I was going to post something about this yesterday. The CFTC has charged a handful of small players with market manipulation in response to the 2008 oil spike to $147 a barrel. And I'm really at a loss for what these guys did that was illegal. Sure, they tried to corner the market for WTI crude at a specific choke point, but there's nothing illegal in risking your capital to buy a commodity. In the following video, Aaron Task makes the good point that the price spike cost the global economy hundreds of billions of dollars, yet these guys are being blamed for it after making only $50 million? Help me understand this one, guys.
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Banks are blamed for everything,their just scapegoats. One month ago,EU announced a probe agains all major invesment banks (from GS to UBS amd BAML to RBS) for CDS trading.Reading the whole text,the charge was that they payed very low clearance payments to Clearstream,thus violating competition laws...
PS,not only the charge was not really about CDS trading (as they presented it),but also Clearstream was actually violating the law,not the banks...
Yeah, but these guys aren't even a bank. They're just speculators. It looks to me like the CFTC is scapegoating these guys to make it look like they're accomplishing something rather than go after the big banks like JPM for their silver short, or GS for their own crude oil manipulation (as alleged by Fadel Gheit on Bloomberg TV here).
Here's the reason this is illegal, this is a practice call "Banging the close". If you have agree to the stipulations of operating in the US commodities market you have sign papers agreeing that you will not conduct business in this manner. What the practice does is cause a false appearance of a lack of supply in a proprietary market. If you know about the Salomon Bros situation where they amassed an illegal percentage of the T- bill repo market market is much the same. Unlike the repo market that has a definite percentage as to how much you can hold as a position the CFTC does not have this same requirement. This is why its not as hard and fast.
But more so we all see different groups do illegal actions and get away with it scott free everyday. The trick is that most of these US regulatory commissions have finite resources and will most likely not go after you for once or twice and usually they will just tell you to stop unless the action is beyond the pale. These guys much like WWF wrestling back in the day went to the well one time too often and got the smack down. Also, banging the close is only illegal in the positive not in the negative. Go figure.
Also , we all know the more money and influence you have i.e Treasury = Goldman the less problems you have when it comes to being investigated, sanctioned, or ..........
Where does the CFTC site them banging the close? Amaranth banged the close of the nattie mkts. This is def. not the same scenario. Read the CFTC post on their site. It practically accuses them of being good traders.
I'll try:
The purpose of the economy is to serve the population (citing James Goldsmith).
The purpose of a democratic government (in the english sense of the word, not republicans/democrats etc.) is to uphold the interests of the nation and the people, current and future, over which it rules. It also has a lesser responsibility to the rest of the planet.
Thus combining the 2 above points, any act by a small group of people that has a cascade reaction to affect the global economy significantly, (and this shit costs lives people, higher prices means lower budgets for governments etc. - less) and therefore should be illegal.
I agree with you that it is not free market, and is certainly acapitalistic, but it is something that harms the interests of the population and therefore should be made illegal under assumption 2 above.
By that logic, Sergey Brin and Larry Page would get the chair.
Last time i checked, the average consumer doesnt suffer by using google. This isn't about monopolistic competition law. Billions of people suffered because of the actions of a few, with no benefit at all. Plus big corporations pay for big lobbyists. The banks throw a few traders they dont like to the lions to appease the masses and keep their hands in the cookie jar.
I don't get it Eddie. One day you are complaining about JPM entering a huge short on silver but not getting prosecuted; the next, you are complaining about regulators going after market manipulators. It honestly sounds like your anger is really just directed at folks who are long USD/short commodities.
Not at all. My point in this particular case is that I'm struggling to see how these guys manipulated the market. It seems to me that the CFTC is attempting to look like they're doing something when in fact the worst offenders (like JPM as you mentioned) get off scott free.
I honestly have no bias when it comes to trades I'm not personally involved in. If someone is long the dollar and makes a few bucks, nobody is happier for them than me. Likewise, once silver got above $35 I told everyone who would listen to get out.
The regulators should be going after people who break the law. But they should be going after the right people. If they think the American public will be appeased by the sacrifice of a couple of pikers from Rancho Santa Fe, they're sadly mistaken. The American people want a TBTF bank CEO's head on a spike.
I'm remembering an example from the recent Irish crisis. I can't remember who the guy was, but he was the CEO of one of the worst banks leading to Ireland's crisis. He's utterly bankrupt now, has been stripped of all his assets, and he has to get government approval to receive any personal loan above €600. That's what the American people want to see.
It reminds me of how the gov't went after Martha Stewart for a relatively small infraction around the time of the Enron bankruptcy - they were correct, but more importantly needed a symbolic 'head on a pike'.
It's a similar case with Raj getting locked up: he was an easy case to win and the SEC needed to justify its own sorry existance given that it failed to prevent the Madoff scandal, and CAN'T [yet] find a case against the BB's.
I do not believe it is illegal what they did. I can mention 10 other companies who do the same. They are one of the bigger players in the crude spreads.
According to the video, which does not give enough detail, the suggestion is that these guys were trying to corner the market. They were going long not because they thought the oil price was heading higher, but because they thought they could force it higher and then take profits.
This is analogous to short-squeezing: you are not buying because you believe the item is undervalued, but because you believe that if you buy enough, you can get the short-sellers by the balls and get a lot of money out of them.
Both of the strategies above are considered market manipulation, and are illegal.
Why are they illegal? My argument would be that they take liquidity out of the system, and because they rely on price changes created by their own actions, not price changes which reflect real supply and demand. That's bad for everyone in the market except those lucky enough to sell at the right time.
So in my book, these guys did something illegal, which is illegal for a very good reason, and they should have their day in court.
Funny, wasn't the price driven up in the first place by the SPR filling up its facilities
http://online.wsj.com/article/SB121029497174279551.html?mod=opinion_mai…
Why isn't the CFTC going after the Federal government, since they ran up the price?
I think the trades were done by firms owned by the same guy. Basically if I went long oil the other side as taken by a company I own. These types of transactions manipulates supply data further causing an increase in oil prices. This is just my understanding
The CFTC doesn't offer contract limits only reportable position limits, so what they did was not illegal per say, just unethical which they do have rules against. Their just attempting to make an example of someone. If they have enough liquidity to attempt to corner they have enough liquidity for high price lawyers because they are going to need them. I do believe the financial world needs more regulation, but this shouldn't be the way they go about it in my opinion. You can not attempt to penalize someone for a loop hole that you created.
unethical attempt to manipulate the market for sure, which the CFTC can hit them for under its mandate. These guys are getting hit because it will be easier to prove they are in the wrong
Oh dear, here we go again, it was the evil speculators! Someone's gotta pay for stopping up America's SUVs.
I think Eddie has the right idea, they have to look like they're doing something so they find someone that's easy to pick on. I second the suggestion that the SPR had a lot to do with the oil price spike.
Jimmy Dyer is probably as well known in crude circles as John Arnold is in natural gas. They are definitely not "a handful of small players."
This wasn't banging the close at all. The CFTC complaint centers on their activity in the physical market, not the futures market, and the complaint doesn't even mention the derivatives (options) market.
For those unversed in the terminology, here is how the CFTC defines "banging the close":
interesting how many people here would still think it was illegal if they made a loss of $50million...?
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