Energy Traders Avoid Scrutiny

By David Cho
Washington Post Staff Writer
Sunday, October 21, 2007

One year ago, a 32-year-old trader at a giant hedge fund named Amaranth held huge sway over the price the country paid for natural gas. Trading on unregulated commodity exchanges, he made risky bets that led to the fund's collapse -- and, according to a congressional investigation, higher gas bills for homeowners.

But as another winter approaches, lawmakers and federal regulators have yet to set up a system to prevent another big fund from cornering a vital commodity market. Called by some insiders the Wild West of Wall Street, commodity trading is a world where many goods that are key to national security or public consumption, such as oil, pork bellies or uranium, are traded with almost no oversight.

Part of the problem is that the regulator, the federal Commodity Futures Trading Commission, has had a hard time keeping up with the sector it oversees. Commodity trading has exploded in complexity and popularity, growing six-fold in trading volume since 2000 -- the year that a handful of giant energy companies, including Enron, successfully lobbied to get Congress to exempt energy markets from government regulation.

Meanwhile CFTC's staffing has dropped to its lowest level in the agency's 33-year history. Its computer systems that monitor trades are outdated. Its leadership has seen frequent turnover.

"We are facing flat budgets and exponential growth in the industry," said CFTC Acting Chairman Walter Lukken. "Over the long term this type of budgetary situation is not sustainable."

The House Agriculture Committee is holding a hearing Wednesday on whether to expand the CFTC's authority and budget. In the Senate, Carl M. Levin (D-Mich.) has proposed a bill that would require all energy commodity exchanges to register with the agency and establish trading limits on investors. But similar efforts over the last few years have failed to make it out of committee. And this year, getting the House and Senate to vote on the matter may not be easy, given their busy agendas.

Some who work in the commodities markets question whether the CFTC, even if it got more money, would be an effective monitor because much of the trading occurs in private and is untraceable. Others criticized Levin's bill as overly broad, saying it could stifle markets that, Amaranth notwithstanding, have been working well.

Lawmakers acknowledged there are issues that have to be ironed out. But they are also concerned about time running out this year.

"We need to put a cop back on the beat in U.S. energy markets to stop excessive speculation and trading abuses," Levin said. "We have all seen what can happen if we don't act."

He was talking about Amaranth and its former star trader, Brian Hunter.

Hunter started trading energy commodities at age 24. After a tumultuous stint at Deutsche Bank, he was hired in 2004 by Amaranth Advisors, a hedge fund in Greenwich, Conn.

After making the fund $100 million in profits in natural gas in 2005, Hunter was promoted to head of energy trading. He began to take gigantic positions in natural gas on a regulated exchange called the New York Mercantile Exchange, or Nymex. Hunter largely traded highly volatile futures contracts, which allow investors to make complex bets on what price a commodity will fetch at various points in the future.

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