Page 24 - Oil and Energy January 2013

24 • OIL&ENERGY
Q&A: Michael Greenberger
demand fundamentals would take over, and
prices would be lower.
If the position limit provision in Dodd-
Frank that limits excessive speculation were
properly implemented, instead of having a
WTI futures market that is 80 speculative,
you would probably have a market that
was like what we saw until the mid-2000s.
If there was volatility, it was supply-and-de-
mand driven. Now there is excess volatility
because too many speculators are sending
demand signals that are just paper bets on
the price of oil or food.
O&E: Was it a systemic failure, or does it
make sense to assign responsibility and
blame? If so, where do we point the finger?
MG: When Lehman Brothers collapsed
and the Fed decided not to rescue them, it
became clear that if another big bank failed,
we’d have systemic risk. That is, so many
banks would default on obligations that it
would have had a cascading, deleterious
impact worldwide with one bank collapse
after another, because one bank’s assets had
disappeared from a previously collapsed
bank. That was prevented because the
American taxpayer made good on the losses
to the tune of trillions of dollars. That was
a heavy price for the American taxpayers
to pay. It made most of banks appear to be
solvent, but that has not helped the average
homeowner or business, just the banks.
It didn’t save the rest of the economy.
O&E: Do you think CFTC will ultimately
gain authority to police position limits?
MG: They have the authority. The question
is how do they exercise it. Their view was
they had a mandate to do it. The District
Court that invalidated that CFTC order and
said it had to go back and show that it was
necessary and appropriate to have position
limits made the agency’s job more difficult.
If the agency has to promulgate a new
regulation, they will and it will be positive
for the price of food and energy, but we’ll
lose a lot of time waiting. If they are able
to reverse the judge’s decision, the position
limit rule would go into effect immediately.
It’s a question of time, and time here is
money and it’s the payment of commodity
prices, especially in the energy sector,
that are unnecessarily high and threaten
the recovery and present the risk that the
United States will fall back into recession
while continuing to pay a $25 premium
on crude oil, for example, that is actually
money going into the pockets of big bank
speculators.
O&E: Which regulations and rules do you
see as the most important for restoring fair-
ness to the commodities markets?
MG: Position limits is a very important rule,
and we’re at ground zero on that. The other
rules that govern trade in risky swaps will
help too. You’ll have to have capital reserves
and collateralize the swaps transaction, and
the transaction must be transparent so the
entire market can see what’s going on, and
the contract will be cleared, and the nature
of the contracts will be transparent to the
public. The regulations that do that are
almost completed, and I think they’ll be
very therapeutic to economic stability when
they are completed.
We also need to resolve the foreign
subsidiary issue so that you don’t have the
classic canary in a coalmine that we saw in
the 2008 meltdown when a UK subsidiary
of AIG bet $400 billion and lost. The banks
are arguing a UK subsidiary of a U.S. entity
should be regulated by the UK. But if that
UK subsidiary causes a default, it’s not the
UK but the U.S. taxpayers that they look
to for a bailout. The U.S. taxpayer must be
protected, and we’ve got to make sure that
our protective principles are in play, or if
the UK plays the part of the primary regu-
lator, that they have rules just as strict as
ours. Otherwise the U.S. taxpayer is left on
the hook. It’s only fair that subsidiaries of
U.S. companies should be subjected to our
regulations. If other countries have the same
regulations, that’s OK, but we can’t have
U.S. corporations setting up subsidiaries
abroad with the design to escape Dodd-
Frank while looking to the U.S. taxpayer
for bailout relief.
O&E: Do you perceive a lack of ethics and
disregard for clients on Wall Street? If so,
what can be done to encourage ethical
behavior?
MG: My view is that ethics must correspond
to legal requirements. If Dodd-Frank is
properly implemented, Wall Street will have
to do things that will wind up being viewed
as ethical behavior. One major shortcoming
we have seen is the failure of the Justice
Department to hold anyone criminally
responsible for the financial meltdown. The
way ethics will be abided by is if the criminal
laws are enforced, and people who violate
laws with ethics embedded in them will be
put in prison. The Justice Department has
been AWOL in seeing that that happens.
The only way to ensure ethical behavior by
Wall Street is to ensure that our laws are
fully enforced.
O&E: Please assess the performance of the
commodity markets for bona fide hedgers,
such as fuel retailers. Can they get the
protection they seek by hedging their
commodity buys?
MG: Absolutely not! The main reason is that
these are no longer hedging markets; these
are gambling markets. There is no way that
a hedger has a fair chance in those markets.
The margin requirements are so erratic that
it’s hard to hold a hedging contract in place
for the term of the contract. The only way
heating oil dealers will be protected in the
markets is by reducing the participation of
speculators from 80 percent to 30 percent.
The counterpoint is the natural
gas market, where [the Federal Energy
Regulatory Commission] FERC was given
co-extensive jurisdiction with the CFTC for
manipulation. FERC has brought several
manipulation actions over the last six to
seven years, and price of natural gas went
from $15 to as low as $1.71 in April 2012.
The price is low because you have regulators
in the natural gas markets fighting fraud and
manipulation. The CFTC could do more
if the Republicans in control of the House
of Representatives would let the agency
have more employees. They have 700 now,
and they need at least 1,100. The hedging
markets will not be protected until the
CFTC has the employees it needs. They are
doing a terrific job now under very harassing
circumstances. The CFTC needs help. Until
it gets that help, the American consumer and
taxpayer are at extreme financial risk.