Tuesday, October 18, 2011

Learning to Fly the Hard Way

The Commodities Futures Trading Commission has finally approved rules that will sharply restrict the banks and hedge funds ability to manipulate commodity prices. The rule making process has been held up for a year by lobbying but mostly thanks to one corporate Democrat on the CFTC that sided with the two Republican Commissioners to slow walk and water down the changes mandated by the Dodd-Frank Act.

The Act requires the Commission to ban trading by those who do not produce or use commodities, but the law allowed for “rule making” and the devil is in the details. There is some concern that the rules are so full of loopholes as to have no effect. The rules were only grudgingly approved by the swing vote of  Michael Dunn (he says, “only to comply with the Law”) and while a Democrat, Dunn was appointed to the five person Commission by George Bush. He sides with Republicans in the belief that no such rules are necessary, and the CFTC has more important work to do. Dunn’s term is ending but his replacement requires Senate approval, so a progressive replacement is not likely to be confirmed under the current filibuster rules, even if Obama appoints one.

The new rules do limit banks to holding no more than relatively small number of futures contracts in a single commodity in the 25 areas that are regulated by the Act. That is if the banks aren’t allowed to skirt the rules by carrying on the pretense that each trading desk is a separate entity, negating any real effect. Republicans are incensed that any restrictions are being placed on the “free market” and suggest there could be a Court challenge. They conveniently forget that these activities were only de-criminalized in the 90s. Of course for the current Supreme Court, reversing long standing precedent to favor their rich cronies is their bread and butter. Oh and by the way, these rules could take another year (or more) to come into full effect.

Bank earning reports are out and Goldman Sachs lost a half billion last quarter, but the big headline is that Bank of America, until recently the largest bank, made a cool 6.2 billion. Except they didn’t, the entire “profit” came from the write down of their outstanding debt by creditors. It's sort of like when BoA settles a delinquent credit card by taking only half of the balance, the customer gets a 1099 for the other half as the IRS treats that unpaid debt as a windfall. It doesn’t mean you are making money and neither is BoA.

BoA also took in 3.6 billion from selling its stake in China Construction Bank but this was just enough to offset a loss of 2.2 B in its private equity business and losses of $1.1 B in consumer real estate. The biggest zombie bank (well, now second biggest) really lost 9.8 B dollars in just three months. Nearly half of American households do business with BoA and as the 99% decline so do the zombie banks. There is a certain satisfaction in this, except that they’ve already crippled this country so badly that we may not recover. We are close to edge, get used to falling or learn to fly. www.prairie2.com


Anonymous said...

But why does the market keep going up in the face of bad news? I heard the news that came out today, just before the market closed, about 2 trillion$ being in the approval stages to rescue Europe, was just an unfounded rumor... But it worked...

I can't believe that retail is buying long into this market.. not in a big enough way to make the huge daily swings we are seeing.

Just how much money are they printing that we aren't being told about. These people on top don't shop for groceries. Their maids or personal chef's must do it for them. Meat is now double or more in price from prices of a year or two ago.

prairie2 said...

High speed trading exaggerates the impact of any rumor. Once a couple of trades move in the same direction, then the computers start bidding against one another and that larger movement can prompt human traders to jump in as well.