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Wall Street's Latest Dark Market Gambling: Ethanol

10/01/2013 03:22 pm ET | Updated Jan 23, 2014

Wall Street's megabanks are at it again. The too-dangerous-to-fail bailout babies have found yet another new dark market to manipulate: ethanol credits, as the New York Times reported

While it sounds pretty harmless, speculation by Wall Street's biggest banks in this obscure commodity -- which was originally created to reduce our dependence on foreign oil -- will drive up prices at the gas pump and hurt Main Street. Transparency, oversight and regulation are needed to help keep prices in check and protect consumers.

In 2007, Congress passed new Renewable Fuel Standards (RFS) requiring an increasing amount of ethanol be incorporated into the nation's fuel supply over time. To enforce compliance with the mandate, Congress came up with a credit system: every gallon of ethanol produced or imported would be assigned a renewable identification number (RIN).

After buying ethanol and blending it into their fuel, energy companies submit the RINs to federal regulators to prove they met RFS obligations. Excess RINs can be sold as credits on the open market to third parties -- including bankers. But the federal biofuel requirements for 2013 require an amount of RINs that exceeds the available supply, which led to a steep increase in RINs prices.

With the price of RINs skyrocketing and banks permitted to trade the newly prized commodities, it was only a matter of time before JP Morgan & Co. would discover the potential for profit. As the Times noted, "Traders for big banks and other financial institutions...amassed millions of the credits just as refiners were looking to buy more of them to meet an expanding federal requirement."

As with so many of the problems in our financial markets, the broader problem is that this market isn't regulated. According to the Times, "Rules that apply to almost every other market - on transparency, disclosure and position limits, for example - are not imposed on the trade of RINs." And the EPA has refused to disclose who is trading in these markets, or how many credits they have amassed.

Oil refiners say that unless something changes soon, they will have no choice but to pass the added costs on to gas prices, which independent observers have said could rise by up to a dollar. This situation must be addressed before the speculation and price increases do even more damage.

For starters, the Commodities Futures Trading Commission should take a close look at Wall Street's speculation on ethanol credits and formulate common sense regulations that will prevent future spikes at the gas pump. The EPA should release the names of RINs traders to establish transparency in this opaque market. Rampant, unregulated Wall Street speculation by taxpayer-backed too-dangerous-to-fail megabanks must not be allowed to wreck another market and inflict more pain on Main Street.