Efforts to Smoke Out the Rats

A Huffington Post article about efforts in Congress and by the Obama administration to clamp down on speculative manipulation in the energy markets.

But now, as a comprehensive climate bill wends its way through the House of epresentatives, some of these aggressive commodities practices have come under crutiny. New legislati proposed by Rep. Waxman (D-Calif.) and Rep. Markey (D-ass.) would create a system of carbon allowance permits that the government would sell to companies that want to circumvent new emissions requirements. These permits could end up spurring as much as $2 trillion in new carbon-based "derivatives." In this ase, these new derivatives, so-called because they derive their value from omething else, would be traded on the commodities markets, and without proper regulation, critics worry their prices could be manipulated much in the way that traders influence the price of oil.

With the combination of the upcoming climate bill that that could create a
major new commodity derivatives market, in addition to a new focus from the Obama administration on derivatives, experts are hoping that regulation will be strengthened. Experts and legislators say these two forces have created a
perfect storm, and that the opportunity is ripe to take a broader look at the
overall commodities market rather than be limited to reforming only derivatives.

President Obama last week called for the overhaul Wall Street, and as part of his proposal, he zeroed in on regulating over-the-counter (OTC) derivatives, or those instruments that are bought and sold via verbal contracts. Because they are not traded on an exchange, OTC derivatives leave no paper trail and lack transparency. At this time, it seems probable that the pollution derivatives would be traded over the counter.

[...]

Sanders is one of a five legislators who has proposed legislation in recent weeks that would change the freewheeling Chicago market by strengthening regulations and, in some cases, bolstering the oversight powers of the Commodities Futures Trading Commission (CFTC). Sanders is hoping to compel the CFTC to invoke its emergency powers to stop traders from participating in excessive oil speculation.

Other legislation related to reforming the commodities markets includes an amendment in the climate bill sponsored by Rep. Bart Stupak (D-Mich.) to close several commodity market loopholes; a proposal by Sen. Tom Harkin (D-Iowa) to
put all commodities trades on transparent exchanges, and a bill by Rep. Collin Peters (D-Minn.) that originally called for expansive changes for commodities but that was substantially weakened after going through committee.

One of the most pressing issues addressed by much of this new legislation is the role of large bank holding companies like Goldman Sachs and Morgan Stanley. The firms earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.

[...]

Other legislation related to reforming the commodities markets includes an amndment in the climate bill sponsored by Rep. Bart Stupak (D-Mich.) to close several commodity market loopholes; a proposal by Sen. Tom Harkin (D-Iowa) to
put all commodities trades on transparent exchanges, and a bill by Rep. Collin Peters (D-Minn.) that originally called for expansive changes for commodities but that was substantially weakened after going through committee.

One of the most pressing issues addressed by much of this new legislation is the role of large bank holding companies like Goldman Sachs and Morgan Stanley. The firms earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.

[...]

While numbers are hard to come by, Morgan Stanley said in its November 2008 SEC filing, that it held $18.7 billion in commodity futures, options and swaps. In its annual report, the company said that commodity revenues had jumped 62 percent. The bank also reported to the SEC that it had committed $452 million solely to lease petroleum storage facilities in 2009.

As for Goldman, 17 percent of if its $22 billion in revenue in 2008 came from fixed income, currency and commodities, which includes all of its energy trading business. Meanwhile, Citigroup's trading division, Phibro, reported the total value of its commodity derivatives increased to $214.5 billion in 2008, a 384 percent increase from 2004. Bank of America held $58.6 billion in these derivatives as of September 2008.

- Brewskie