Stop Gambling On Hunger

On February 3rd, Senator Maria Cantwell (D-WA) held a press conference with members of the Derivatives Reform Alliance (DRA), the mega-coalition of organizations including most of those listed on the this site.

Some of the more revealing quotes from the different speakers follow:

Senator Maria Cantwell

“To get our economy on track, we must bring full transparency and capital requirements to the entire derivatives market. This will prevent a repeat of the massive losses in unregulated derivatives trading – losses that taxpayers ultimately paid for”

“The House of Representatives has passed legislation riddled with loopholes, which will not result in change. I will be fighting in the Senate to pass strong legislation to repair the failed financial regulatory system, and I will be working to close all loopholes to prevent any return of risky business.”

Michael Masters, President, Masters Capital Management, LLC

“The failure of AIG, Lehman Brothers, and Bear Stearns. The collapse of our financial markets. The loss of trillions of dollars of wealth by investors in the United States and around the world. A residential and commercial real estate crisis. The failure of hundreds of banks. A surge in firings and layoffs by employers… What’s the connection? Unregulated and non-transparent derivatives markets.”

“The catastrophic effects of unregulated and non-transparent derivative trading are not abating. Already, according to a recent report by the Bank of International Settlements, the level of notional exposure in derivatives by financial intermediaries around the world has grown to over 604 trillion dollars. This level of exposure is higher than all other historical periods, with the exception of June 2008, just before the worldwide financial market collapse.”

“In 2009, financial institutions pushed over 105 billion new dollars into the crude oil markets, buying the equivalent of almost 400 million barrels of crude oil via derivatives contracts. Undoubtedly, this wall of money had a significant upward effect on the price, as crude oil prices almost doubled last year. Moreover, just in January of this year, according to recently released figures, CME volumes in commodities derivatives soared by over 18% over last year as new speculators poured into commodity markets.”

Paul Cicio, President, Industrial Energy Consumers of America

“The price of energy commodities like natural gas to our companies is critical to our global competitiveness and jobs. We are competing with countries like China who actually subsidize and fix the price of natural gas to their manufacturers. That’s right… no volatility and there is price certainty.”

“…too many Senators still do not believe that excessive speculation is a problem. To that point, let me offer you that proof by describing what happened to natural gas prices in.. 2008. During the first half of 2008, the NYMEX price of natural gas rose from $7.17 per mm Btu in January to a high of $13.60 per mm Btu in July before prices began to recede. During the same time period, the Energy Information Administration reports that domestic production increased by 8.6 percent; demand was essentially unchanged from the previous year and national inventories were within the five year average range for that time of year. Based on supply and demand, prices should have fallen.”

Mr. Cicio also referred to a Bloomberg article about the US Natural Gas Fund (UNG), an index fund. “Bloomberg reports…it (UNG) held July NYMEX futures contracts as well as swaps and ICE futures on natural gas equal to 98 percent of the value of the open interest of the July NYMEX that day… This is only one such fund and the number of index funds is expanding rapidly.”

Brother David Andrews, Senior Representative, Food & Water Watch

“The USDA reports the highest food insecurity since reporting began in 1995. In 2008, 17 million households were food insecure. The 2009 Hormel Hunger Survey reported that nearly a quarter of American adults said they have eaten less this year in order to ensure their children have enough food”

“While food is only part of the costs families incur, perhaps 10 to 17 percent of income expenditure for domestic families, upwards of 2/3 of income is spent on food in developing countries.”

“At the recent Food Summit in Rome, the Pope, Benedict XVI condemned the role of speculation in food price increases, [saying] ‘greed which causes speculation to rear its head even in the marketing of cereals, as if food were to be treated just like any other commodity.”

“Speculation has been a factor in the growth of hunger at home and abroad. This is a serious moral issue that we can deal with if we face up to our responsibilities.”

Sean Cota, Cota & Cota Oil

“One of the main factors that caused oil prices to rise so dramatically is excessively leveraged speculators in the energy derivatives marketplace who have distorted market fundamentals and led to the oil price bubble of 2008 and the price surge seen the last few months.”

“If the markets were to be valued on supply and demand of the actual physical commodity – as used to be done before the investment community took over the commodity markets – American consumers would pay at least $1.00 per gallon less at the pump today.”

“Without sufficient oversight and aggregate position limits, market activity can distort the price of oil. For every one cent per gallon change in gasoline prices – it’s worth one billion dollars to the American consumer.”

Randy Mullett, American Trucking Association, Inc.

“One year ago, oil cost $42 per barrel. Today, oil has jumped to $74. Yet during this past year, global demand remained weak, crude oil inventory in storage was well above average, and the dollar declined by only 8 percent relative to the Euro. In the face of these market realities, excessive speculation is the only other variable left unaccounted for.”

Mr. Mullett offered the solutions that members of the DRA recommend. “The government must require transparency for all markets that trade energy [and food] commodities and establish aggregate position limits across all markets, including over-the-counter markets and foreign exchanges.”

An article in Corporate Counsel shows how the Commodity Futures Trading Commission (CFTC) is unable to prosecute traders even though they admitted to manipulating the propane gas market with their speculative investments. Despite the fact that “BP Products North America Inc., the subsidiary of BP Products North America Inc., the U.S. subsidiary of the British energy giant, had already agreed to pay $303 million to settle civil allegations that it manipulated the propane gas market, the U.S. Department of Justice had taped phone conversations in which one defendant bragged about being able to ‘control the market at will,’ and a fifth trader pleaded guilty and agreed to cooperate, the CFTC lost the case in an appeal.

This is because currently, the CFTC, responsible for regulating the commodities markets, has to prove that speculators had specific intent to do harm rather than merely proving recklessness as the SEC is able to do for the past 75 years. Specific intent is a much more difficult standard to prove.

This is why the third point of our proposed solutions calls for making the burden of proof for the CFTC equal to that in the SEC. The article states that, “derivatives experts say the ruling makes prosecution of commodity futures manipulation virtually impossible. Frank Partnoy, a professor at the University of San Diego School of Law, said that, if the government can’t prosecute, it will never know exactly how much manipulation really goes on. ‘Anyone who’s actually engaging in manipulative trading will be thrilled to read this opinion.’”

The Telegraph has interesting article on the CFTC’s recent announcement that it will place speculative limits in the four principal energy commodities.

“It is hardly surprising given the CFTC’s light-touch history that its new limits on positions in oil, natural gas, heating oil and gasoline this week provoked scarcely a murmur from the markets.

‘Position limits are so generous that we do not expect any direct market impact,’ analysts from Commerzbank said dismissively after the long-awaited announcement.”

The article shows how speculators are already acting to avoid the rules:

“Hedge and index funds will be the main losers, but there have been suggestions that breaking up into smaller funds could circumvent the new measures.”

It then does a fair job of explaining the OTC, over-the-counter, markets:

“It is here that the most obscurity – of much more concern than speculation in itself – is to be found, both among paper and physical commodity traders. These derivatives are traded directly between parties, without the cost and interference of a clearing house or regulated exchange. They are more complex and risky, with US observers such as Brooksley Born blaming them for uncertainty about junk assets lurking on balance sheets in the credit crisis. Nobody – not the regulators nor the funds themselves – could see who had built up the riskiest positions, adding to the seizure of the markets.”

The article adds, ominously:

“It appears that some of the funds usually trading on the regulated exchanges have already swapped to trading over-the-counter futures.”

The article shows why true financial reform must do away with the OTC markets by making all trades clear through exchanges. As the article states,

“Those against these laws have argued that business could migrate from the West to other financial centres if the rules were too draconian. With 80 [percent] of commodities traded in the US and Europe, it would be a major and unlikely shift for traders to seek loopholes in the looser markets of Asia and the Middle East.

Make sure your Senator has heard from you about this important issue. Click here to send them a message now.

Bill Moyers has a great interview with two journalists who have articles in Mother Jones magazine’s Jan-Feb 2010 issue that denounces Wall Street corporations’ actions in relation to the economic collapse.  The reporters do a good job explaining the state of things in Congress; how Wall Street investment firms still have so much influence there. The House bill that passed in December is full of holes that mean excessive speculation will be able to continue, unless the Senate strengthens the bill – a difficult goal to say the least.

This is why it is so crucial for all who read this to write to our Senators (use the Take Action! process here to make it easy). Encourage your family and friends to write as well. Congress needs to know that this issue is important to more than just those on Wall Street.

Last Friday, the House of Representatives passed H.R.4173, the Wall Street Reform and Consumer Protection Act of 2009. While there were some improvements in terms of consumer protections from financial deals and measures for dealing with systemic risk, or the “too big to fail” phenomenon, in the area of commodity speculation, we did not do too well.

Adam White has a good piece on four major loopholes in the bill that favor commodity speculators. All four loopholes remain open. Bloomberg also has a piece talking about the House’s bill and Wall Street’s influence over it.

The end lesson is that we need to work to make the Senate bill even stronger than the House’s bill – not an easy proposition at all.

This is why it is so important to tell friends and family about this site, asking them to write to their elected officials. January will be a key month for financial reform. Do your part to help spread the word.

Folks at heatingoil.com have put out a good piece that explains a little of the “inside baseball” of commodity market reforms. It’s especially helpful in explaining who’s who and some key ideas like “clearing” and “derivatives.”

From the article:

“…Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC) is pushing for more regulation of commodities trading. In doing so, he’s following his expressed belief that commodities speculation caused excessively high prices last year and needs to be controlled while angling for a larger share of the oversight—and presumably, the federal budget—for his agency…”

“With three government agencies [CFTC, SEC, Federal Reserve] with regulatory authority, each with its own “corporate” culture, priorities, and approach, there’s a potential for confusion and conflict.”

The Huffington post has an interesting article showing how Wall Street fat cats are getting small and medium sized businesses to do their lobbying for them. And it’s working! We really need to make sure Congress knows that we want serious reform. To be more effective, ask a couple friends in your area to contact their Congresspersons about commodity speculation.

From the article:

“Wall Street titans, recognizing that they have something of a credibility problem when it comes to opposing regulatory reform, are enlisting more sympathetic, everyday folks to lobby on their behalf on Capitol Hill.”

“Some of our heating oil dealers have heard directly from their investment companies and their traders that they work with,” said Sherri Cabrera of the Petroleum Marketers Association of America. Those traders, she said, have pushed the companies to lobby their representatives for an exemption from the regulated derivatives exchange for heating-oil companies.”

And the lobbying is having its effects:

“The reform legislation in the lower chamber contains gaping carve-outs for end users, which could effectively undermine any effort to bring light to the dark pools of capital that the system nearly drowned in last fall.”

A source who works closely with Congress on these issues, and would prefer to remain anonymous, told me that Senators on the Banking committee are “being flooded with meeting requests from individual utilities, banks, funds, industrial agribusiness and so on.” The executives and hedge fund managers come armed with powerpoints and charts to “educate” lawmakers about confusing derivatives and how limiting their ability to speculate will harm their businesses.

The source said the Senators weren’t hearing hardly anything from people demanding limits to speculation. It’s crucial that they hear from us and know that the people want to have sturdy, safe markets where speculators can’t run the show.

After you go to the Take Action page and write to your Senators and Representatives, give a call to a few members of the Banking Committee and let them know how important this issue is to you. Here are the names and phone numbers of Senators in the Banking Committee (all in the 202 area code):

Christopher J. Dodd Chairman (D-CT) 224-2823

Tim Johnson (D-SD) 224-5842

Jack Reed (D-RI) 224-4642

Charles E. Schumer (D-NY) 224 6542

Evan Bayh (D-IN) 224-5623

Robert Menendez (D-NJ) 224-4744

Daniel K. Akaka (D-HI) 224-3934

Sherrod Brown (D-OH) 224-2315

Jon Tester (D-MT) 224-2644

Herb Kohl (D-WI) 224-5653

Mark Warner (D-VA) 224-2023

Michael Bennet (D-CO) 224-5852

Jeff Merkley (D-OR) 224-3753

Richard C. Shelby Ranking Member (R-AL) 224-5744

Robert F. Bennett (R-UT) 224-5444

Jim Bunning (R-KY) 224-4343

Mike Crapo (R-ID) 224-6142

Bob Corker (R-TN) 224-3344

Jim DeMint (R-SC) 224-6121

David Vitter (R-LA) 224-4623

Mike Johanns (R-NE) 224-4224

Kay Bailey Hutchison (R-TX) 224-5922

Judd Gregg (R-NH) 224-3324

Senator Maria Cantwell (D-WA) has a great article at the Huffington Post about Wall Street’s gambling problem. Here’s some quotes from the article:

“The problem is that many of these banks have resumed their old habit of using other people’s money to gamble with the same risky unregulated derivatives that led us into this crisis.”

“Look no further than the powerful lobbying arm of the financial services sector, which has spent at least $220 million this year lobbying Congress to stave off new rules to prevent another collapse. That is over $500,000 in lobbying for every member of Congress…”

“While derivatives trading can be complex, the underlying concept is simple enough: keep trading secret and off-book and pocket profits from both sides of a trade.”

“According to the Office of the Comptroller of the Currency, the nation’s five largest commercial banks held 95 percent of the $291 trillion derivatives portfolio of the country’s 25 largest bank holding companies at the end of the first quarter. More than 90 percent of those derivatives were in unregulated trading.”

“Let’s embrace productive capitalism, not casino capitalism, by restoring transparency and true competition in the commodities markets.”