Wednesday, October 21, 2009

CFTC Gets Cold Feet

Just when I thought I couldn't be any more disappointed in the weak-minded, lily-livered bodies that we call US 'regulators' I saw an article in the Financial Times this morning that made me want to scream. It appears that the CFTC is going to wimp out of trying to impose position limits on commodities, particularly oil. It is afraid that the US will lose business to other centers if it does. This is probably true. the UK is ready and waiting for more traffic through ICE, and the Dubai Merc is poised to take advantage of any US outflows. But the fact remains that the huge positions taken by non-oil entities in 2008 contributed to a massive oil price bubble. CFTC Commissioner Bart Chilton said as recently as July that the CFTC was not going to "minimize the role that speculators are playing." Now he is dancing around the subject stating that the regulator would "set the bar high" regading limits. Michael Dunn recommends offering "generous" limits. Jill Sommers prefers to err on the high side as well, but I get the feeling she is really focused on OTC issues. Only chairman Gary Gensler seems to be holding firm on the limits idea. It is new commissioner and unknown quantity Scott O'Malia who holds the wild card in my opinion. O'Malia was originally nominated by big-oil, big-car GW Bush and somehow slipped by President Obama's due diligence team. O'Malia was a hard-line lobbyist against environmental measures and for electricity deregulation. Unbelievably he worked for the now-bankrupt electricity company Mirant, which contributed greatly to the spectacular electricity meltdown (also involving Enron) in California in 2000-2001. After the crisis, CA attorney general Bill Lockyer, said that Mirant was "one of the worst offenders during the Energy Crisis. They told grid operators generating units were down when they weren't. They created bogus grid congestion, then received premium payments to relieve it. To avoid in-state price caps, they created the illusion of importing energy from out of state." O'Malia said at his confirmation hearing that this experience opened his eyes to the consequences of inadequate regulation. Let us hope so. I will be watching you Mr. O'Malia.

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