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Gary Gensler of the CFTC: Reformer or Wolf in Moth Eaten Sheep's Clothing?

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Much press has been dedicated these past few days to Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC) and ex-Goldman Sachs partner. A New York Times article regales us over his apparent transformation from a hard-line acolyte of then Treasury Secretary and former Goldman Chairman Robert Rubin, long an advocate for a 'hands off government' over derivatives trading that was to grow to a $300 trillion (I repeat, trillion) runaway market and become an unsupervised, unregulated financial WMD.

That, supposedly, was then and this is Gensler now: "Wall Streets interest is not always the same as the public's interest." Or, "Wall Street thrives and makes money in inefficient markets, and I am creating efficiencies in the market." Really?

Back in May 2009 Gensler took over the CFTC, an agency that in July 2008 organized an "Interagency Task Force on Commodity Markets" report and, with oil prices scaling $147/bbl, concluded that it "does not support the proposition that speculative activity has systematically driven changes in oil prices." A conclusion I leave to the reader to determine whose interests were being taken into account.

Apost concurrent to Gensler's confirmation raised the issue that oil prices had increased dramatically from February 2009 lows of $32.70/bbl to $60/bbl in May 2009, causing the likes of the Financial Times to comment that the fundamentals are "weaker, much weaker than current prices imply." The implications of speculation and/or manipulation were clear, and Gensler at the CFTC would now be in the hot seat.

What has happened since? The price of oil has extended its rise from $60/bbl to over $80/bbl, and that with imports of oil down significantly, given that oil storage terminals are full, and having a surprisingly positive impact on our foreign trade balance. Yet irrespective of more than ample supply in the upside down world of oil prices: the more oil there is on the market, the more we pay per barrel.

But then Gensler's CFTC gave us a bright shining moment of an oil industry influenced government's reversal in form and candor on issues oil. On July 27, 2009 the Wall Street Journal blazoned their headline, "Traders Blamed For Oil Spike," advising that the CFTC was to issue a report 'next' month "suggesting that speculators played a significant role in driving wild price swings in oil prices -- a reversal of an earlier CFTC position." As well that month, the CFTC had announced that it was considering volume limits on energy futures by financial/proprietary traders and tougher information requirements. Almost immediately the good folks on Wall Street energized their K Street lobbying clan to stop the CFTC and their old work mate Gensler in their tracks. We are still waiting for that report!

The outrageous dysfunction of the commodity markets and the tepid CFTC oversight continued blithely along. Late in the week of November 9th, 2009 the Energy Information Service announced that oil stocks had surged by 1.762 million barrels, much more than expected, and that the U.S. refineries processing rate sank to 79.7%, the lowest in more than two decades. Against all reason, instead of collapsing prices, the price of oil jumped by $2.50 on the very day of the announcement, eliciting a post, "The CFTC and Department of Energy Snore Away While the Oil Patch Makes Hay" 11.18.09.

And so it continues. While Mr. Gensler and his CFTC Vaudeville act continue to fiddle away, the distortion in oil prices is burning a billion dollar hole a day in American consumers pockets (please see "The Billion Dollar Day Extortion: A Somnolent Administration and Dysfunctional Congress' Gift to the American People" 02.22.10).

As for Mr. Gensler, he is now, after all these months calling for some form of federally mandated limits on speculative trading on oil, gas and other energy futures. But don't hold your breath. It will all be subject to a 90 day comment period. When all is said and done it will be a year or more since Mr. Gensler's ascension that anything will have been accomplished, if at all, to rein in the distortions being promulgated on the commodity exchanges. In the meantime, billions are being transferred to oil interests from the pockets of American consumers and putting at risk the feeble economic recovery now underway!

An apocryphal comment in the NYTimes article refers to Gensler's time at the Treasury when asked to investigate derivatives held by South Korean Banks and being "amazed at how little information the banks could provide"

"Knowing what we know now, we should have banged the table more forcefully" he now says.

Well Mr. Gensler, as oil trading has become the litmus test of all commodity exchange based pricing, we are waiting to hear the loud bangs, especially when it comes to oil!