Regulator seeks to rein in energy market trading by big Wall Street firms
Thursday, April 1, 2010
The nation's commodities regulator is proposing to limit the vast amounts of oil, natural gas and other vital goods the world's biggest investment firms can buy and sell, seeking to eliminate the unfettered access these companies have had to energy markets for 20 years.
The rule would also force this highly lucrative trading into daylight, requiring for the first time that the public be told which companies have special permission to trade commodities with virtually no constraints.
By reversing course, the Commodity Futures Trading Commission, under its activist chairman, Gary Gensler, is trying to prevent the concentration of power in the hands of a few large businesses. For example, a single firm, the United States Oil Fund, was able to gain the rights to nearly one-fourth of all the publicly traded crude oil scheduled for delivery during one month last spring, the fund's head said in an interview.
Advocates of the commission's proposal have said the influx of Wall Street money has led to violent price swings. In 2008, the price of a barrel of crude oil leapt to a record of more than $147 and within months crashed to below $34. This volatility not only disrupts household budgets but also makes it hard for food manufacturers, airlines and other companies to get the goods they need when they need them, the advocates said.
Traditionally, commercial companies were the main players on the commodities markets, buying contracts for oil, for example, that guaranteed future delivery on a specific date for a locked-in price. But Wall Street banks eventually discovered that they could trade these contracts like financial securities and make money without ever taking delivery of the goods. Before long, the banks won exemptions from federal trading restrictions and were able to speculate on unlimited amounts.
If a majority of the five-member panel approve the commission's latest proposal, the rule would dramatically scale back the exemptions given to firms such as Goldman Sachs, J.P. Morgan Chase and Morgan Stanley. Although the government keeps the identities of the firms private, financial analysts have figured out some of them.
Separately, the Senate is considering a broad overhaul of the financial oversight system that in part would regulate for the first time the trading of commodities contracts in private transactions, which occur away from the established exchanges and are known as "over the counter." The legislation would force nearly all of the trading onto public exchanges, undercutting the financial advantage firms get from their ability to keep the prices they pay secret.
This shadow world of private deals exists beyond the purview of regulators, and federal officials estimate that the value of these deals is many times that of transactions conducted on open exchanges. If big financial firms win the right to continue trading huge amounts of oil, natural gas and other goods in private deals, they would simply move their business off the exchanges and maintain their dominance, some commission officials warn.
No company has benefited more than Goldman Sachs, market analysts say. During the financial crisis, when most of the firm's other business activities were suffering, commodities trading produced "particularly strong results," according to its annual report. Goldman does not disclose how much it earned from these trades. But along with its bonds and currency divisions, commodities activities generated about half of its net revenue of $45 billion in 2009, Goldman reported.
Financial analysts estimated that these activities in typical years account for about a tenth of the firm's revenue. The analysts added that the commodities division is one of the bank's crown jewels, noting that many of Goldman's top executives emerged from that operation, including chief executive Lloyd Blankfein.
It's not just financial firms that have much at stake. Over the years, Goldman Sachs and other big brokerages promoted commodities investments to pension funds, hedge funds and endowments. Industry officials warn that the pensions of millions of public employees could suffer if the government cracks down on commodity trading.
Leading the charge to rein in outsize trading is none other than a former Goldman Sachs star, Gensler. President Obama appointed him last year to head the CFTC.