Wednesday, August 26, 2009

Unknown Knowns

Donald Rumsfeld famously said there are things we know that we know and there are things that we know we don't know. I would add there are things that we don't know that we know. Like whether the CFTC is going to increase position limits on commodities futures and remove the exemptions that the bulge bracket banks have enjoyed. I think we pretty much know that they will enforce limits, but officially we don't know. The reason I say this is because the FT today reiterated that the CFTC reiterated that it has doubts that banks should be exempted from position limits. Gary Gensler told the FT that he doesn't share the view that swap dealers (big banks) are 'passive mechanics in the marketplace.' Well, guess what? No one shares that view except the banks themselves. That the FT is reiterating the CFTC's opinion on this at this time sounds to me like the paper has a little birdie telling it something. One of my sources believes that the CFTC is probably already forcing the banks to cut back on their commodities futures positions to comply with the limits that are already in place by the exchanges. It would be hugely embarrassing for all parties if the extent of their current (and especially past) non-compliance were to be revealed. So once they have them cut down to size the CFTC will be able to unveil the new guidelines and - with a straight face - tell the world that the banks were already largely complaint. Face saving all around.

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