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I
can’t say as I’m surprised by the announcement late Friday that
lobbyists representing JP Morgan, Goldman Sachs, and Morgan Stanley, among
others, had successfully obtained a judgement
quashing the proposed position limits on speculative traders in commodities.
According
to Bloomberg:
“U.S.
District Judge Robert Wilkins in Washington today ruled that the 2010
Dodd-Frank Act is unclear as to whether the agency was ordered by Congress to
cap the number of contracts a trader can have in oil, natural gas and other
commodities without first assessing whether the rule was necessary and
appropriate.
“Although
the court does not foreclose the possibility that the CFTC could, in the
exercise of its discretion, determine that it should impose position limits
without a finding of necessity and appropriateness, it is not plain and clear
that the statute requires this result,” the judge said in his 43-page
ruling.
The
International Swaps and Derivatives Association Inc. and the Securities
Industry and Financial Markets Association sued the commission, arguing that
the CFTC never studied whether the regulation was “necessary and
appropriate” or quantified the costs tied to implementing the rule. The
groups represent banks and asset managers including JPMorgan Chase & Co.
(JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley. (MS)
The
message has been sent to the primary manipulative forces in the markets for
commodities: “You may continue to influence prices contrary to the
interest of the global economy at will.”
The
immediate peril as a result of this ruling, is that the gold and silver bull
trends revived by the unlimited capital fabrication now underway will be teed
up for another huge short that will send the prices tumbling whenever the
colluding entities decide the time is ripe.
As Bart
Chilton, one of the CFTC commissioners stated in response,
“There’s no question that huge individual trader positions have
the potential to influence prices in a way that hurts legitimate hedgers and
ultimately consumers.”
The
average investor and even the principles of investment banks are challenged
by what they view as a complex market, and who are easily persuaded to
dismiss the evidence. But the new ruling is a re-enforcement of the
conditions that allow such manipulation to persist.
It is
unfathomable to thinking individuals how the complacency is so ubiquitous.
Its not a simple concept to understand. Absent position
limits, futures and forwards contract originators can create as many
contracts as they can find buyers for to sell or buy gold at a fixed price in
the future.
In a
properly regulated market, (and by the simple logic
of supply and demand economics) it would either be a) required that the originator
of a forward sale actually have the commodity on hand to sell, or b) that the
buyer of a forward sale actually take delivery.
This would
imply that there could not be contracts issued representative of more gold,
silver, or oil than is readily available for delivery i.e. not more than is
produced.
The
opposite is the case now, and looks like it will be going forward, thanks to
the absence of position limits. With market participants able to create as
much apparent and artificial demand and/or supply as they like, the prices of
commodities are at the mercy, in large part, of the market participants. And,
as we’ve seen by the recent LIBOR scandal, banks do not act in the
interests of their clients, or the governments who make their larceny
possible, or the general public.
Furthermore,
without legislation to force reconciliation of dark market pools, where all
kinds of commodities and other derivative instruments are traded on an
unregulated basis in an invisible market, the massive nominal value of the
entire derivatives market, estimated to be in excess of $600 trillion, calls
into question the ability of regulators to protect the interest of the
broader financial system against reckless betting.
With the
death of the position limits rule, one must question the likelihood that
other Dodd-Frank legislation will get shot down as a result of lobbying
against it in the courts.
Businessweek reports
that “Starting next year, new rules will force banks, hedge funds, and
other traders to back up more of their bets in the $648 trillion derivatives
market by posting collateral. While the rules are designed to prevent another
financial meltdown, a shortage of Treasury bonds and other top-rated debt to
use as collateral may undermine the effort to make the system safer.”
This rule
will no doubt also see challenges from lobby groups backed by market
participants. The incremental dilution of the Dodd-Frank act is a growing
catalyst for more financial calamity.
If the
rule stands, the stage is set for the necessity to fabricate more
capital, to create enough “top rated” debt instruments to act as
collateral in the grand derivatives casino. If it doesn’t get cancelled
by a complicit court.
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