Posts Tagged Commodity Futures Trading Commission
House Republicans Try to Create a World Fit for Criminals | News & Politics | AlterNet
Posted by Michael B. Calyn in Congress, Perspective on June 24, 2012
New Economic Perspectives / By William K. Black
House Republicans Try to Create a World Fit for Criminals
Why are politicians getting away with deliberately creating a system in which elite white-collar crime can flourish?
June 13, 2012
Photo Credit: Shutterstoc
In criminology, we recognize that one of the leading restraints on the effectiveness of law enforcement is what is known as “systems capacity.” Indeed, my mentor, Henry Pontell (UC Irvine), defined the concept. In the context of crimes of the street (other than Wall Street), there is normally no lobby trying to allow the typically lower class criminals to commit their crimes with impunity. In crimes of the business suites, however, it is the norm that there are well-funded, powerful, and seemingly legitimate lobbyists for the elite criminals who seek to allow them to commit their crimes with impunity. Similarly, it is rare for street criminals to consult a lawyer before they commit their crimes. Elite white-collar criminals often consult with expert legal counsel before, during, and after they commit their crimes in order to try to minimize the risk of being sanctioned.
One of the most obvious ways to produce a criminogenic environment is to create systems incapacity to detect and sanction crime. House Republicans are doing that in the context of elite white-collar crime. That context also happens to be the leading campaign donors for both parties.
On June 9, 2012, The New York Times published an important editorial entitled“Lost the Vote? Deny the Money.” The editorial will be ignored by the Obama administration and Republicans but it is well worth reading in full. Here are some key excerpts.
If you wanted to reproduce the conditions that led to the Great Recession in 2007, the easiest way would be the plan unveiled last week by House Republicans: gut the regulators who are supposed to keep the worst business practices in check.
At a time when the economy is still reeling from the downturn, House Republicans released a spending bill that would severely cut the budget of the Commodity Futures Trading Commission, which would keep it from regulating potentially toxic swaps and other derivatives. It refused to give the Securities and Exchange Commission the extra money it needs to carry out the Dodd-Frank financial reform bill.
And the bill would cripple the Internal Revenue Service, limiting its ability to detect tax avoidance, particularly by businesses and the wealthy. (The I.R.S. cut, designed to impede the agency’s role in health care reform, will inevitably increase the deficit.)
With 710 employees, the C.F.T.C. staff is barely big enough for its current responsibilities, let alone its new mission under Dodd-Frank to oversee the huge over-the-counter swaps market. Its budget is $205 million, which President Obama proposed increasing to $308 million for 2013 to deal with swaps. The House Appropriations Committee has proposed slashing next year’s budget to $180 million.
The agency’s chairman, Gary Gensler, said: “The result of the House bill is to effectively put the interests of Wall Street ahead of those of the American public, by significantly underfunding the agency Congress tasked to oversee derivatives — the same complex financial instruments that helped contribute to the most significant economic downturn since the Great Depression.”
As Mr. Gensler pointed out, the market in swaps, at $300 trillion, is eight times larger than the futures market his agency has been regulating, and yet the House wants to cut the agency’s budget significantly. The House committee chairman, Harold Rogers, said the agency should return to its “core duties,” a statement that brazenly ignores a new set of duties Congress put on the books.
In this essay I make four brief points. First, the House Republicans’ proposals would produce the most criminogenic environment in the world that risks an even larger financial crisis and outright depression. This isn’t simply the lesson of the current crisis. George Akerlof and Paul Romer explained the point in 1993 in their classic article (“Looting: the Economic Underworld of Bankruptcy for Profit”). They made this paragraph their conclusion in order to emphasize the message.
“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (Akerlof & Romer1993: 60).
Akerlof was made a Nobel Laureate in economics in 2001.
Second, the losers from creating a criminogenic environment that encourages looting are not “merely” the public – the losers include honest businesses. When cheaters gain a competitive market, competition becomes perverse and firms controlled by the least ethical CEOs can drive their honest competitors from the marketplace. Akerlof made this point explicitly in his even more famous 1970 article on markets for “lemons” where he wrote about the economics of anti-purchaser control frauds. He called it a “Gresham’s” dynamic.
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
Modern executive compensation causes accounting control fraud to produce a powerful Gresham’s dynamic. CFOs rightly fears that their tenure may be measured in months if they do not mimic their rivals’ use of accounting control fraud to produce what Akerlof and Romer aptly termed a “sure thing” of record reported income that, in turn, produces enormous executive compensation.
Classic economists stressed the essential role of government – providing a rule of law and preventing and punishing criminal acts, including fraud. Ayn Rand stressed that government had a duty to prevent fraud. The essence of crony capitalism is the ability to commit fraud with impunity. The Tea Party opposes crony capitalism and the House Republicans quake in fear of upsetting the Tea Party and being challenged in the Republican primary.
We have deregulated, desupervised, and de facto decriminalized finance in the U.S. and Europe to an unprecedented extent in the last 30 years and the results have been uniformly catastrophic. Governor Romney states that he intends to repeal the entire Dodd-Frank Act and recreate the criminogenic environment that caused the financial crisis and the Great Recession.
We have four dogs that have failed to bark. Conservatives have long claimed to be the party of law and order – where are they. The data are in – the Bush and Obama administrations have been soft on elite white-collar crime (by their largest campaign donors). Libertarians and Tea Party supporters who hate crony capitalism – rise up and demand an end to the elites who grow wealthy by committing fraud with impunity and cost millions of Americans and Europeans their jobs.
And where are President Obama and Attorney General Holder on this issue? The editorial quotes only regulators. The President and the Attorney General should be taking the lead and denouncing the deliberate recreation of a criminogenic environment. Here is the central fact that Holder and Obama have never grasped – effective investigations and prosecutions of epidemics of elite financial frauds are only possible where the regulators and the SEC do the heavy lifting. The regulators will only do the heavy lifting if their leaders understand control fraud and make its detection, termination, sanctioning, and prosecution their top priorities. Bush and Obama have overwhelmingly appointed failed, anti-regulators like James Gilleran, John Reich, John Dugan, Timothy Geithner, Alan Greenspan, Ben Bernanke, Harvey Pitt, and Susan Schapiro. They have also appointed attorney generals who have all been weak on elite financial fraud.
The epidemic of accounting control fraud by financial institutions that drove the Great Recession was the largest and most costly example of white-collar crime in history. But all we have heard from Obama and Holder is minimization of the role of fraud in the crisis and the same abject failure as the Bush administration to prosecute the elite frauds that drove the crisis. The minimization of fraud comes from the death of criminal referrals by the regulatory agencies. Neither the banking regulatory agencies nor the FBI has conducted what would have been considered in our era a serious investigation of an elite financial institution. When it comes to elite frauds; if you don’t look you don’t find. Having falsely claimed that there were only trivial violations of the law, the Obama administration has emasculated its ability to go credibly to the public and warn that the House Republicans are about to recreate the criminogenic environment that produces our recurrent, intensifying financial crises. Holder and Obama cannot credibly claim that the House Republicans are about to allow our financial elites to again grow wealthy through fraud because Holder and Obama are continuing Mukasey and Bush’s policy of granting de facto immunity to the elite criminals who caused the crisis.
Prominent Republican writers have recently urged their Party to destroy crony capitalism. Instead, their representatives are trying to entrench it. Prominent progressives have been urging Obama to destroy crony capitalism. Instead, he has entrenched it by taking his financial advice from Robert Rubin, Lawrence Summers, Geithner, and Bernanke. Neither party is willing to take on their leading source of political contributions. We need a party, an attorney general, and a slew of regulators who will make it their mission to end crony capitalism in America. Europe needs the same thing.
Bill Black is the author of ‘The Best Way to Rob a Bank is to Own One’ and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
House Republicans Try to Create a World Fit for Criminals | News & Politics | AlterNet.
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Senators put federal regulators, not JPMorgan, on the hot seat – The Washington Post
Posted by Michael B. Calyn in Banking, Finance, GOP, Law, Opinion, Wall Street on May 23, 2012
Opinion Writer
Senators put federal regulators, not JPMorgan, on the hot seat
By Dana Milbank, Published: May 22
JPMorgan Chase has spent upward of $20 million on lobbying and campaign contributions in the past three years. On Tuesday, the bank received a healthy dividend on that investment.
Its chairman, Jamie Dimon, has admitted that the firm was “sloppy” and “stupid” in making trading bets that lost $2 billion. But Republicans on the Senate Banking Committee wouldn’t hear of it; they preferred to blame government.
As the panel held the first hearing on the JPMorgan losses, Sen. Richard Shelby (Ala.), the committee’s ranking Republican, glowered at federal regulators and charged that they “didn’t know what was really going on.”
“When did you first learn about these trades?” Shelby inquired.
Gary Gensler, head of the Commodity Futures Trading Commission, admitted that he had learned about them from press reports.
“Press reports!” Shelby echoed, with mock surprise. He smiled. “Were you in the dark?”
Gensler tried to explain that his agency does not yet have authority to regulate the bank, but Shelby interrupted. “So you really didn’t know what was going on . . . until you read the press reports like the rest of us?” he asked again.
“That’s what I’ve said,” Gensler repeated.
But Shelby wanted him to keep saying it. “You didn’t know there was a problem there until you read the press reports?”
Shelby’s performance was worth every bit of the $72,950 JPMorgan Chase and its employees have given him in the past five years, making the bank his second-largest source of campaign cash. It was a remarkable bit of jujitsu: The trading scandal at JPMorgan highlighted the urgent need for tougher regulation of Wall Street, but Shelby’s harangue was part of a larger effort to use the scandal as justification torepeal regulations.
JPMorgan has a long and colorful history in Washington, but this may have been the most absurd episode since 1933, when J.P. Morgan Jr. sat waiting to testify before the same Senate committee on the 1929 crash and a circus dwarf hopped onto his lap and posed for photographs.
Dimon himself has speculated that the firm’s misbehavior would increase pressure for more regulation. But Republicans decided to defend the industry with a strong offense. Republican National Committee Chairman Reince Priebus set the message when he said this month that the JPMorgan episode showed “Dodd-Frank didn’t work.”
This is richer than John Pierpont himself ever was.
It’s true that Dodd-Frank, the legislation responding to the 2008 economic collapse, hasn’t worked — because it hasn’t been put in place. At the heart of the proposed reforms is the “Volcker rule,” named for a former Federal Reserve chairman, which attempts to separate banks’ gambling from their government-backed deposits. This mimics the situation before the Depression-era Glass-Steagall law was repealed in 1999.
Banking lobbyists managed to weaken the Volcker rule in 2010 by securing exemptions.Even the watered-down version has been slowed by a barrage of objections from executives — none louder than Dimon. And regulators haven’t had the funds to keep up with the workload. The result is that key parts of the law haven’t been implemented.
Now industry-friendly lawmakers are using the scandal to discredit never-implemented regulations. Although reformers hoped the JPMorgan losses would give them momentum, it’s a good bet the company will win the argument, if only because it holds so many IOUs.
According to data compiled by the Center for Responsive Politics, most senators on the Banking Committee have received sizable checks from JPMorgan and its employees over the past five years. They are the largest source of funds for Republicans Bob Corker (Tenn.), $61,000, and Mike Crapo (Idaho), $33,982, and the committee’s Democratic chairman, Tim Johnson (S.D.), $38,995. They gave $108,800 to Mark Warner (D-Va.), $34,800 to Chuck Schumer (D-N.Y.) and lesser amounts to three other members. The group also found that 38 members of Congress, including three on the committee, were JPMorgan shareholders as of 2010.
As the hearing began Tuesday, Securities and Exchange Commission Chairman Mary Schapiro argued that JPMorgan’s activities would have been more easily monitored “if the Dodd-Frank rules had been in place.”
But the Republicans were more inclined to blame the Dodd-Frank law itself — tiptoeing past the awkward fact that it hasn’t been in force. Corker predicted that “the American people are going to wake up” and realize “this big Dodd-Frank bill really doesn’t address real-time issues.” Nebraska Republican Mike Johanns added his concern that “regulations become more and more onerous.”
And Pennsylvania Republican Pat Toomey judged that “we’ve gone down the wrong road” with Dodd-Frank. The better course, he said, is a less intrusive plan that would “let the people in the marketplace make the decisions they will make.”
Sounds nice. But that’s what gave us 2008.
Senators put federal regulators, not JPMorgan, on the hot seat – The Washington Post.
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A First Test on the Resolve for Banking Reform – NYTimes.com
Posted by Michael B. Calyn in Banking, Editorial, Government, Opinion on May 22, 2012
Their Learnable Moment
Published: May 21, 2012
On Tuesday, the Senate Banking Committee is holding a hearing on reforming derivatives — not a topic one would expect to draw a lot of energy or attention. But in the wake of JPMorgan Chase’s stunning trading loss, now reportedly at $3 billion and counting, committee members need to push the regulators testifying — and each other — to explain why, four years after the financial meltdown, speculative trading in these risky instruments has not been reined in.
The Dodd-Frank law was supposed to bring much-needed oversight to the multitrillion-dollar market for derivatives, including transparent trading, mandatory reporting and higher capital and collateral requirements. But banks, with help from lawmakers in both parties, have lobbied regulators to delay and weaken the rules.
The committee’s ranking Republican, Senator Richard Shelby of Alabama, has vowed to repeal Dodd-Frank altogether. The panel’s chairman, Senator Tim Johnson of South Dakota, and Senator Charles Schumer, a Democrat of New York, have called for looser rules on banks’ international derivatives trades.
After JPMorgan’s losses came to light, Mr. Johnson issued a statement saying that it shows “why opponents of Wall Street reform must not be allowed to gut important protections for the financial system and taxpayers.” He is right. Now he and other committee members, and the regulators, need to show what they have learned.
The senators can start on Tuesday by pressing Mary Schapiro, chairwoman of the Securities and Exchange Commission, and Gary Gensler, chairman of the Commodity Futures Trading Commission, to complete the rules on derivatives; the process has dragged on for nearly two years. Senator Johnson should make clear that, from now on, protecting the public from another financial crisis is his committee’s top priority.
One of the first questions Ms. Schapiro and Mr. Gensler should be asked: What sort of rules would have stopped JPMorgan from engaging in the risky trades that led to its multibillion-dollar losses?
We have no doubt about the answer. What is needed are requirements for derivatives to be traded on transparent exchanges — which would have prevented the trades from piling up without notice. Banks should also be required to move any derivatives deals into separately capitalized bank affiliates, which would protect taxpayers, and the banks, from disastrously large losses. Banks fought hard to keep those provisions out of Dodd-Frank, and, even now, they are still pressing to scale them back.
The banks and their allies won’t give up easily. Mr. Johnson and all the senators who say they want reform must assure the regulators that their budgets will not be a political football. The Republican lawmakers who failed to block the passage of Dodd-Frank have since tried to starve the regulatory agencies charged with implementing reform.
The Senate must also take the lead, starting now, in curtailing the House’s attempts to roll back reform. Several bills have already passed, and others are pending, that would give broad exemptions to regulation for all manner of derivatives trades — loopholes that would allow JPMorgan-style trading to proliferate. JPMorgan’s fiasco should be a teachable — even a transformational moment: one that ensures that all the necessary financial reforms are finally put in place.
A First Test on the Resolve for Banking Reform – NYTimes.com.
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The fallacy of oil ‘speculation’ – The Washington Post
Posted by Michael B. Calyn in Opinion, Perspective on May 3, 2012
Opinion Writer
The fallacy of blaming oil ‘speculators’
By Robert J. Samuelson, Published: May 2
“We still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil. . . . We can’t afford a situation where speculators artificially manipulate markets.”
We should exorcise the politically convenient notion that high oil prices result from the market maneuvers of greedy “speculators.” It’s convenient because it suggests that a solution to high pump prices — or a partial solution — is to banish the offending speculators from the marketplace. That’s fantasy.
Despite periodic debunking, it returns whenever oil prices surge. In mid-2008, with crude prices approaching $150 a barrel, the Commodities Futures Trading Commission (CFTC) created a task force to study whether speculation caused the run-up. The task force included experts from the Agriculture, Energy and Treasury departments, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission.
“Current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. . . . The Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”
Four years later, the consensus remains. Testifying before Congress in March, Howard Gruenspecht, head of the nonpartisan U.S. Energy Information Administration, said:
“The increases in crude oil prices since the beginning of 2011 appear to be related to a tightening world supply-demand balance and concerns over geopolitical issues that have impacted, or have the potential to impact, supply flows from the Middle East and North Africa.” (The reference to potential disruptions involves Iran.)
Speculation remains a popular theory because it seems to explain oil’s wild price swings. In 2002, crude prices averaged about $25 a barrel. By 2008, the average was roughly $95. In 2009, it plunged to about $60; now it’s above $100. These gyrations baffle most people. Conspiracy theories are appealing.
The actual explanation is more humdrum. Oil demand is what economists call “price inelastic.” People need it to drive cars, heat homes, fly airplanes and run factories. So small shifts in supply or demand can result in big price moves. A large jump in demand or loss in supply raises prices sharply; similarly, prices may plunge when demand dips (from, say, a recession) or supply increases (from, say, new fields).
The 2008 CFTC report found that, from the late 1990s, growth in world oil demand — especially from China and other developing countries — outstripped new production capacity, so the market tightened and prices rose. From 1996 to 2002, spare production capacity averaged 3.9 million barrels a day (mbd), about 5 percent of world oil demand of 77.1 mbd in 2000. By 2008, spare capacity had dwindled to 1.7 mbd on global demand of 86.5 mbd. In this period, China’s oil use rose two-thirds, from 4.6 mbd to 7.7 mbd.
Although the Great Recession temporarily led to lower prices, the modest recovery hasraised global demand to nearly 90 mbd, shrinking spare capacity. It’s now between 1.8 mbd and 2.5 mbd, Daniel Yergin of the consulting firm IHS CERA recently testified to Congress.
It’s true that outside investors (a.k.a. “speculators”) have dramatically shifted money into commodities — raw materials. “Commodity index funds,” which invest in a basket of commodities (oil, wheat, corn), have attracted hundreds of billions of dollars. It’s easy to imagine all this money chasing prices up in futures markets, just as speculative stock market frenzies push share prices to unrealistic levels. It’s also wrong.
The stock and futures markets operate differently. In the stock market, herd psychology can lead to speculative bubbles or panics. In a bubble, almost everyone seems to win (until the bubble bursts); in a panic, everyone seems to lose (until the panic subsides).
By contrast, futures markets are “zero-sum games.” One investor’s gain is matched by another’s equal loss. Here’s why. Under the standard futures contract, one investor agrees to buy the commodity (say, 1,000 barrels of oil) at a future date for a given price, and another investor agrees to sell for the same price. If the actual price on the settlement date has gone up, the buyer reaps the gain; if it’s gone down, the seller wins. The loser pays the winner; actual commodities are rarely transferred.
In theory, prices on futures markets could raise prices on spot markets, where real oil is bought and sold. Some studies find a link, but most do not, reports a survey by economists Lutz Kilian, Bassam Fattouh and Lavan Mahadeva. Instead, futures and spot prices reflect “common economic fundamentals.”
Casting speculators as scapegoats for our dependence on high-priced global oil is easy and misleading. It obscures the only real solution: Use less, possibly through an energy tax, and produce more.
The fallacy of oil ‘speculation’ – The Washington Post.
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Ban ‘Pure’ Speculators of Oil Futures – NYTimes.com
Posted by Michael B. Calyn in Economy, Editorial, Opinion on April 11, 2012
The High Cost of Gambling on Oil
By JOSEPH P. KENNEDY II
Published: April 10, 2012
Boston
THE drastic rise in the price of oil and gasoline is in part the result of forces beyond our control: as high-growth countries like China and India increase the demand for petroleum, the price will go up.
But there are factors contributing to the high price of oil that we can do something about. Chief among them is the effect of “pure” speculators — investors who buy and sell oil futures but never take physical possession of actual barrels of oil. These middlemen add little value and lots of cost as they bid up the price of oil in pursuit of financial gain. They should be banned from the world’s commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon.
Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.
Because of speculation, today’s oil prices of about $100 a barrel have become disconnected from the costs of extraction, which average $11 a barrel worldwide. Pure speculators account for as much as 40 percent of that high price, according to testimony that Rex Tillerson, the chief executive of ExxonMobil, gave to Congress last year. That estimate is bolstered by a recent report from the Federal Reserve Bank of St. Louis.
Many economists contend that speculation on oil futures is a good thing, because it increases liquidity and better distributes risk, allowing refiners, producers, wholesalers and consumers (like airlines) to “hedge” their positions more efficiently, protecting themselves against unseen future shifts in the price of oil.
But it’s one thing to have a trading system in which oil industry players place strategic bets on where prices will be months into the future; it’s another thing to have a system in which hedge funds and bankers pump billions of purely speculative dollars into commodity exchanges, chasing a limited number of barrels and driving up the price. The same concern explains why the United States government placed limits on pure speculators in grain exchanges after repeated manipulations of crop prices during the Great Depression.
The market for oil futures differs from the markets for other commodities in the sheer size and scope of trading and in the impact it has on a strategically important resource. There is a fundamental difference between oil futures and, say, orange juice futures. If orange juice gets too pricey (perhaps because of a speculative bubble), we can easily switch to apple juice. The same does not hold with oil. Higher oil prices act like a choke-chain on the economy, dragging down profits for ordinary businesses and depressing investment.
When I started buying and selling oil more than 30 years ago for my nonprofit organization, speculation wasn’t a significant aspect of the industry. But in 1991, just a few years after oil futures began trading on the New York Mercantile Exchange, Goldman Sachs made an argument to the Commodity Futures Trading Commission that Wall Street dealers who put down big bets on oil should be considered legitimate hedgers and granted an exemption from regulatory limits on their trades.
The commission granted an exemption that ultimately allowed Goldman Sachs to process billions of dollars in speculative oil trades. Other exemptions followed. By 2008, eight investment banks accounted for 32 percent of the total oil futures market. According to a recent analysis by McClatchy, only about 30 percent of oil futures traders are actual oil industry participants.
Congress was jolted into action when it learned of the full extent of Commodity Futures Trading Commission’s lax oversight. In the wake of the economic crisis, the Dodd-Frank Wall Street reform law required greater trading transparency and limited speculators who lacked a legitimate business-hedging purpose to positions of no greater than 25 percent of the futures market.
This is an important step, but limiting speculators in the oil markets doesn’t go far enough. Even with the restrictions currently in place, those eight investment banks alone can severely inflate the price of oil. Federal legislation should bar pure oil speculators entirely from commodity exchanges in the United States. And the United States should use its clout to get European and Asian markets to follow its lead, chasing oil speculators from the world’s commodity markets.
Eliminating pure speculation on oil futures is a question of fairness. The choice is between a world of hedge-fund traders who make enormous amounts of money at the expense of people who need to drive their cars and heat their homes, and a world where the fundamentals of life — food, housing, health care, education and energy — remain affordable for all.
Ban ‘Pure’ Speculators of Oil Futures – NYTimes.com.
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