Monday, May 19, 2008

Congress to look into role of investment funds in rising energy and commodities prices

For a couple of years now it has been abundantly clear that money from investment funds, hedge funds, and financial institutions has been the root cause of the huge run-up in energy and commodities prices, but nobody seemed to notice or care. Now, all of a sudden, it is becoming a bigger deal, and now even Congress is getting ready to pile on. An article on MarketWatch by Laura Mandaro entitled "Financial speculators on congressional hot seat - Lawmakers to query role of investment money in commodity spikes" informs us that the Senate Committee on Homeland Security and Governmental Affairs will be holding a hearing on Tuesday to look into research about how "Pension funds and other institutional investors are driving commodity prices to the moon by allocating massive amounts of money to energy and agricultural investments and sidestepping regulatory limits on big speculative bets." Bingo! They finally hit one of the key factors: "sidestepping regulatory limits on big speculative bets." In particular:

A fund that wants to buy a huge position in a commodity can enter into a so-called swaps contract with an investment bank, which can then buy futures. These swap arrangements skirt the limits that the fund, as a speculative or noncommercial trader, would typically face on buying futures. The investment bank can use an exemption from such limits because it's hedging these swaps.
 
The swaps loophole has allowed funds to allocate billions of dollars to a particular commodity, regardless of weekly or monthly fluctuations in price, according to Lapolla.
 
Tuesday's testimony could lend support to congressional efforts to curb such speculation.

Normally, entities who are neither producers or direct consumers of commodities are "noncommercial traders", but this swaps ruse is allowing these speculators to speculate as if they were in fact commercial consumers of commodities (such as gasoline refiners, transportation companies, food companies, etc.)

And this is only the tip of the iceberg. Whether Congress digs a lot deeper remains to be seen. And whether Congress actually acts on the results of its investigations is an even larger uncertainty. Still, it is quite heartening to hear that Congress is even aware that there is a problem. And it is just as heartening to see that the financial media is finally picking up on a scandal that has been occurring right under their noses for several years now.

Even if Congress does not "act", the cleansing effect of a little "sunshine" may at least begin to moderate at least some of the most heinous speculative misbehavior of the major financial institutions on Wall Street.

-- Jack Krupansky

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