The opening paragraph of the Securities and Exchange Commission’s (SEC) emergency order restricting naked short selling of Freddie Mac, Fannie Mae and primary dealers issued on July 15 read:

“False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by “naked” short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets.”

This preceded the SEC using Bear Stearns (BSC) as an example of what can happen when rumors get out of control, which begs the question as to why the government allowed—and supplemented through guarantees— JP Morgan’s purchase of BSC at such a discount. Shouldn’t shareholders get compensated?

Continue reading "Strange goings on" »

Sen. Maria Cantwell (D-Wash.), one of the loudest voices in the current battle royale between Congress and what many legislators have decided are evil speculators, has taken another stand by blocking the nominations of CFTC Acting Chairman Walt Lukken, Commissioner Bart Chilton and first-time commissioner nominee Scott O'Malia. "I want them to do their job," she said in a McClatchy news story. But many industry insiders are maintaining that the CFTC IS doing its job - that it's not their job to control prices. And several experts we've talked to say that many of the bills being tossed around Congress by Cantwell and others designed to lower the price of oil show a huge misunderstanding by legislators about the way markets work and may actually raise the price of oil and drive investors out of U.S. markets. One commentor on our blog jokingly suggested that all candidates for Congress must first pass a course in economics before being entitled to speak or write about anything related to commodity or financial markets. So how will this Congressional firestorm end? What do you think?

On Tuesday, Sen. Harry Reid (D-Nevada) introduced yet another bill on designed to "curb excessive oil speculation." This one, however, left out previous bills' calls to impose higher margins on oil traders, such as the one introduced by Sen. Byron Dorgan (D-ND) on June 24 which would require the Commodity Futures Trading Commission (CFTC) to increase margin requirements to 25% for trades classified as non-legitimate hedge trades. Reid's bill calls for "eliminat[ing] excessive speculation by changing the definition of 'legitimate hedge trading' to include only those producers and purchasers of actual physical energy commodities, and places limits on trading by those who are not trading actual physical petroleum products." The Futures Industry Association released a statement on Reid’s bill, calling it a “mixed bag.” “While it mandates appropriate studies and it enhances energy market transparency, the bill has many provisions that would amount to liquidity-robbing, regulatory overkill. We fear that those provisions would undermine the bill’s own transparency goals, make hedging more expensive [and] drive energy market activity overseas,” the statement said.

Continue reading "Margins missing from latest spec bill" »

An article in yesterday’s New York Times cited the length of hemlines as a barometer for economic strength. According to the piece, Wall Street watchers could have predicted the current economic downturn if they had only taken note of the long, flowy skirts featured on fashion runways last fall. Throughout history, when the economy is tanking, women’s hemlines have dropped along with it. The economy was flourishing during the mini-skirted sixties. During the stagflation of the 1970s, long prairie skirts came in vogue, and in the midst of the nineties bull market, short babydoll dresses were all the rage. So if you want to know where the economy is headed, you can either listen to the speeches of Fed Chairman Ben Bernanke, who said yesterday that inflation was too high and that the economy faces a “difficult period;” or sift through the pages of US Weekly, where Angelina Jolie can be seen sporting flowing, to-the-floor tunics. Who knew that fashionistas could be so in sync with the Fed?

A couple of weeks ago following the passage of the Energy Markets Emergency Act we wrote a tongue in cheek blog regarding the legislation and commented that the fact that it was basically an empty gesture was its greatest attribute given that it did not include some of the draconian measures being contemplated by some Senators.

While purporting to fight market manipulation, some Senators have suggested basically creating rules—such as using margin—to manipulate the market. Creating uneven rules on margin as was suggested during one of these hearings to try and affect market activity is a manipulation regardless of its intent. We ended the blog half jokingly by suggesting that with the equity markets under such pressure that it would be ironic if Congress tried to manipulate activity in one market one way and in another—equities—in a different manner. We quipped, “It could happen.”

Continue reading "Stranger than fiction" »

There has always been something controversial about the Federal Reserve System and it has been a target for conspiracy theorists thanks to its complex structure and mix of private and public underpinnings. For an institution that is not technically part of government it wields a huge amount of power over our economy and has the authority to picks winners and losers as demonstrated by its recent intervention in the blow-up of investment bank Bear Stearns.

Tuesday Fed Chairman Ben Bernanke politely asked for additional powers. He noted in a speech to the Federal Deposit Insurance Corporation that, “Another possible step to reduce the incidence and severity of financial crises, recently proposed in the Treasury blueprint for regulatory reform, would be to task the Federal Reserve with promoting the overall stability of financial markets.”

Continue reading "Who voted for Ben?" »

So much for moral hazard!

A Vienna court on Friday sentenced a 73-year-old former Austrian bank executive to nearly ten years in jail for losing more than $2 billion of supposedly secure funds in the Refco debacle and lying about it to his board of directors and investors.

Interestingly, it’s not clear how much Helmut Elsner would have gained beyond ego gratification if the risky play had panned out.

A flamboyant character known for strutting around Vienna as if he owned the city, Elsner ran BAWAG, a bank charged with conservatively managing money for workers’ unions – and seemed to get off on playing hard ball with the big boys of derivatives.

Continue reading "Austrians Sentenced in Refco Fallout" »

It doesn’t seem that long ago when a beaming Terry Duffy, Craig Donohue, Leo Melamed, Jack Sandner, Jim McNulty and Dick Grasso rang the opening bell at the New York Stock Exchange on the day the Chicago Mercantile Exchange went public. It was Dec. 6, 2002 and was one of the most significant and successful initial public offerings of this century.

The Merc launched that day with an offering price of $35. That price would grow to more than $700 five years later and although the CME has lost about half its value since the December 2007 high, if you asked CME leaders in 2002 if they would take 1,000% growth in five and a half years they would probably have taken it.

Continue reading "CME takes its ball from NYSE" »

The day after hedge-fund fraudster Sam Israel III gave himself up to authorities, another one of the dubious dodgers of corporate America was sentenced for his fraudulent dastardly doings. Phillip Bennett, former CEO of Refco, was sentenced to 16 years in prison on July 3. He had pled guilty in February to 20 counts of fraud, conspiracy, money laundering and lying to auditors.

That's it. For bringing down a financial institution, he only got 16 years. Money lost due to his scheme: $2.4 billion.

Let's compare that to some other white color criminal sentencing:

Although Refco officer Tone Grant also was found guilty, he's not being sentenced until early August and further, he didn't plead out his case. He could face 85 years. Money lost due to his (et al) scheme: $2.4 billion

Recently on the lam hedge fund fraudster Sam Israel III will spend 20 years in jail, with another 10 possibly tacked on for his little fugitive drama. Money investors were out due to his scheme: $400 million.

Continue reading "16 years...that's it?" »

Another convicted hedge fund fraudster is back in the news, having filed a lawsuit against his alma mater for his university degree.

You may remember Hakan Yalincak and his fictitious Daedalus Capital Relative Value Fund; back in 2005 he pleaded guilty to one count of bank fraud and one count of wire fraud after he and his mother, Ayfer Yalincak (also known as "Jackie Yalincak," also known as "Ayferefat Yalincak," also known as "Ayfer Elgezdi Yalincak," also known as "Irene Kelly,"- ed. I love that part!) were indicted for fraudulently soliciting more than $7 million from investors.

Yalincak’s move to get his degree transcends pathetic to achieve the sublime for several reasons.

Continue reading "The Stones!" »