Saturday, July 11, 2009

‘Dickweeds,’ ‘Vampire Squid,’ and ‘Morons’

In NY Mag, they prefaced their story on the latest blog fights with this:

It's also a place where, almost every single day, you can witness full-grown adults abandoning the decorum with which they conduct themselves in their "real" lives...Instances of people attacking one another "face" to virtual "face" occur with such frequency, and in so many corners of the web, that it's hard to keep track of what the best fights are.

In the financial arena, they had a story regarding Dennis Kneale and ZH blog fight, and The Rolling Stones Matt Taibbi versus Goldman Sachs "bubble-blowing" machine.

NY Mag opined that Goldman won the scuffle with Taibbi. Some disagreed.

Especially regarding oil.

Don't agree with Goldman Sachs as winner conclusion. I read Lucas Van Praag's email and though the tonality of his response may lead a layperson to conclude that GS "sound[ed] more amused than displeased by the story," truth is that Praag's reply was an obfuscation. Case in point, Praag's reference to "commodity index swap transactions" in 1991 resulting in CFTC granting exemption from position limits, was in fact based on 1990 CFTC statutory interpretation that turned inside out a 1990 court case, Transnor Ltd. v. BP, which had concluded that forwards constituted futures. Interestingly Wendy Gramm, wife of former Senator Gramm, was head of the CFTC at the time, and when she left in 1992 one of her final acts was a 1992 CFTC exemptive order which allowed over-the-counter (OTC) derivatives market to grow in contradiction to the intent of the forward contract exclusion of the Commodity Exchange Act, Section 2(a)(1)(A)). Two years later you may recall the Orange County bankruptcy as a result of OTC derivatives. Fast forward to 2000 and Wendy Gramm's husband Phil helped push through the Commodity Futures Modernization Act which created the Enron Loophole and the London Loophole which has been suspected as causing systemic issues in the oil markets which led to $147/barrel oil in 2008. So what does GS have to do with this... well, GS had developed a commodity index called the GSCI which is mostly composed of oil. The CFMA has allowed commodities to become "financialized" which in turn helps sustain contango conditions. GS owns through a subsidiary oil storage tanks in Cushing OK and engages in oil arbitrage activites. The contango conditions allow GS to engage in a routine arbitrage by shorting futures in far off contracts and then covering those positions without ever delivering oil. This is all backed by WSJ, FT, and NYT articles. In addition, Praag's reference of CFTC August 2008 report that there were few instances when entities would have exceeded spec limits is misleading given that CFTC at time was headed by Lukken. Under Gensler new "conclusions" have come to light. 07/02/2009 at 1:46am

Oh, and BTW, for the layperson... cash commodity markets are not regulated by the CFTC. And while GS's (and Morgan Stanley's) activities in the cash oil markets out of Cushing OK (which is where the global oil benchmark West Texas Intermediate crude contract is based) without regulatory oversight is not proof of any wrongdoing, it leaves open the door for questions as to the exact nature of their activities (given that GS and MS are financial firms not oil producers, distributors, etc.), especially in light of the demise of Enron and $147 oil. But WTF, "ignorance is bliss"... and it's not like we haven't been here before--remember the Pujo investigations regarding the abuses of the "Money Trust"? Oh well, those who forget history are doomed to repeat it 07/02/2009 at 2:08am

@Gammman you are a layperson. The cash/physical markets are heavily regulated by the FERC, which as far greater authority/punitive powers than the CFTC, and a recent ruling in the Amaranth case allowed both the FERC, CFTC AND DOJ to take action for a trader accused of affecting the prompt month contract. The 'loopholes' you refer to allow dealers to offset positions, the net long/shorts are still, and have always been, available on the NYMEX and ICE large trader reports.

And the argument that the GSCI was the sole or even the primary driver of the rise in prompt crude to $147 shows a sorry lack of knowledge on how that market traded the prior 2 years. Global production and demand about equaled during that period, with spare production/refinery capacity at near 0. When that happens sparky, the marginal barrel of production sets the price.

Taibbi is an excellent humorist but nothing more. Kudos to him for carving out a niche and channeling the layman's angst over complex finance - but let's not pretend he actually understands what he (admittedly, excellently) writes. 07/02/2009 at 10:46am

@DRUSSO Zing! Start with an ad hominem… bravo. Okay, for amusement of whoever might read, NY Mag’s editors and the premise of this article, here’s the third round.

1) To your point about the FERC, let’s put this into context: the Energy Policy Act which empowered FERC with anti-manipulation authority was only just enacted in 2005. The whole Amaranth affair started with a regulatory turf war in which FERC was trying to make its bones. Further, during the Bush years Federal agencies were headed up by “Brownies” whose obvious modus operandi was deregulation.

See article, “Battle of the enforcement titans heats up as FERC, CFTC have their day in court” October 1, 2007

As to FERC’s “regulatory teeth,” see January 15, 2009 news release regarding fraud investigation results over past few years.

Also, check out Taibbi’s BNN’s July 2, 2009 interview at 12:00 minutes as a ditto response to effectiveness of “penalties.”

Sorry no HTML or URLs allowed.


2) With respect to the recent MOU between FERC, CFTC and DOJ regarding ‘prompt month contract' oversight, let’s see how on-the-ground oversight actually evolves under the Obama administration. However, to imply that the cash/physical energy market have always been heavily regulated in light of CFMA 2000 and resulting Enron debacle, is one clue suggesting you have an agenda to blur history so as to promote vested interests.

Side note to the Hunter case—street’s narrative is different. Amaranth had blundered by using JP Morgan as its principal broker: “In the wake of the 1998 near-collapse of hedge fund Long-Term Capital Management, many funds that used only one prime broker found those banks pulled their credit lines, forcing the funds out of business,” Breaking Views explains. “It’s now standard practice to use several prime brokers in the hope of avoiding such a fate, and to ensure no one institution can see a fund’s entire trading strategy. Amaranth itself had a dozen prime broker relationships. But it put the bulk of its trades for its main energy strategy through only one.”

See ‘Amaranth's Mistake, JP Morgan's Scandal?’ November 15, 2007

I know you know what I’m implying that this raises a whole other can of worms.

BTW, a study of regulatory history reveals occasional changing of guards: SEC replaced FTC, CFTC replaced CEA. Regardless of the impetus for competition between regulatory agencies (usually instigated by pricing issues/Congress), regulatory arbitrage has always been modus operandi with industry participants—which goes to Taibbi’s point about GS.

More thoughts later… have a great 4th. 07/03/2009 at 7:37pm

3) To your point about my point regarding “loopholes,” again you obfuscate a complex issue which suggests that you are talking your book. You know as well as I do that the COTR has been screwed up due to “spec” vs “commercial” definitions. You also know that OTC derivatives exploded post-CFMA 2000 and that both innovation and issues have resulted in its wake. 350 words is not sufficient space for a retort to your retort on offset positions, and I’m not going to waste my time on something which is well documented and recently acted on by Congress. For those that are curious, here are papers which discuss various “loophole” issues:

“The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat” Permanent Subcommittee on Investigations US Senate

Also lookup “Commodity Markets Oversight Coalition Letter” dated June 3, 2009 and pay special attention to who are signees of letter: “hedgers”!!

With respect to COTR reporting, I recommend reading CFTC’s response to “Comprehensive Review of COT Reporting Program” dated December 5, 2006 to get some historical insight in COT issues. I’ll admit that recently the CFTC has made inroads to improve the COTR but only after industry-wide complaints. It is interesting to note that certain large players in the industry were lobbying (and almost achieved) an elimination of this important report.

As to oil storage concerns, in May 2008 the CFTC announced that in December of 2007, the agency’s Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivative contracts. Question: what has resulted from such investigation? CFTC’s site has no updates on investigation after May 2008 announcement…07/05/2009 at 4:36pm

4) Speaking of GSCI you may want to check out Barry Ritholz’s February 2007 article, “Goldman Sells GSCI to S&P Following 'Lucky' Coincidences.”

In any case, if I implied that the GSCI DJ-AIG was the sole primary driver, my bad—but hey, that was 350 word comment, not some academic paper about commodity "dark markets," synthetic futures, securitized commodities, commodity-linked structured notes, and the evolution of index funds, etc. Of course there were multiple factors causing a reflexive feedback loop! However, to imply that the oil at $147 was purely fundamentally based is… well, let’s just put it this way—I’m not going to devolve into some argument about 2002-08 oil prices which has been debated ad nauseam: see

In any case, it’s your prerogative to maintain a Walsarian worldview. As for me, I’m inclined towards post-Keynesian ideas and think that markets are “messy and uncertain,” “market can stay irrational longer than you can stay solvent,” and the madness of crowds leads to greater fools. Industry pitbulls dogging Masters’ thesis is passé. I suggest reading WSJ article ‘Where has all the oil gone?’ and pay special attention to the last paragraph. Next apply Hicks’ “congenital weakness”, Kaldor’s “convenience yield” theory, and Working’s “inverse carry” observation, along with the behavioral aspects of the hedging response, before arriving at any conclusions about ‘marginal barrel of production’ price.

On the subject of production pricing, even Daniel Yergin noted back in May 2008 that speculative influence on price, as well as reflexive factors were influencing weak marginal production response to higher prices: “oil industry is preoccupied, and indeed somewhat stymied, by how rapidly their own costs are rising.” Perhaps you may want to go back and review your college notes regarding causal relativity as it relates to Kaldor’s, Working’s and Brennan’s cost of storage models. In case you forgot Keynes related the futures price to the expected future spot price not to the current spot price. Also, game boy, don’t forget to apply Sonnenschein-Debreu-Mantel theorem. 07/05/2009 at 5:01pm

5) Goldman, Morgan Stanley Threatened by CFTC Speculator Review

July 8 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley may never have the same leeway in commodities as they did when oil reached a record $147 a barrel last year. The Commodities Futures Trading Commission will consider greater regulation of oil, gas and other energy markets at hearings this month. It plans to review exemptions to trading limits that since the 1990s allowed Goldman and Morgan to build multibillion-dollar ventures in futures, swaps and over-the- counter markets.

“They’re very significant swaps participants, and they’re very significant dealers for over-the-counter swaps in the commodities market,” said Dan Waldman, former general counsel of the CFTC and a senior partner at Arnold & Porter LLP in Washington. “If their ability to do some of that business was limited, they’d have to find other ways to reduce their risk or reduce the size of their commodity swaps books.”

Energy swaps are trades in which parties exchange the difference between two price payments, one fixed and one floating, for a specific commodity for a period of time.

Goldman Sachs and Morgan Stanley accounted for about half of the $15 billion in revenue that the world’s 10 largest investment banks generated from commodities in 2007, Ethan Ravage, a financial-services industry consultant in San Francisco, estimated last year, as energy prices neared records.

Spokesmen for both banks declined to comment, as did one from Barclays Plc. Spokesmen from JPMorgan Chase & Co. and Citigroup Inc. didn’t immediately return calls for comment.
07/08/2009 at 2:29am

Where's Drusso now?

Still face down on the canvas!

Where Jamie Dimon would be!

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