Remember Those Oil Speculators?

by Chidem Kurdas

Less than two months ago, President Obama claimed that speculators were (or at least might be) artificially driving up the price of oil—a notion that some politician or pundit  brings up every time gasoline looks expensive. The idea fades when the market changes direction. Thus in recent weeks, economies worldwide took a turn for the worse and the price of oil came down a notch. Continue reading

Oil Price Politics Implication

by Chidem Kurdas

My previous post about government restrictions on oil and gasoline transportation drew comments saying prices are set in a world  market and the effect of United States policy is negligible. Numerous economic and geopolitical forces influence the price of oil, no question. That does not Continue reading

Naked Truth on NYT Finance Column

By Chidem Kurdas

Media coverage compounds the confusion about financial problems. Take a recent piece by Floyd Norris, probably the best informed of the New York Times finance columnists. 

“Credit-default swaps are, in reality, insurance,” he writes in “Naked Truth on Default Swaps”.  The seller of a credit default swap pays the buyer of the contract if there is a default on the specified bond. Mr. Norris asks: shouldn’t CDS be subject to the principle that “you cannot buy insurance on my life, or on my house, unless you have an insurable interest”?

That would mean that you should not be able to buy a default swap on a bond unless you own the bond. But this is a false deduction, because in practice even life insurance does not work on the insurable interest principle. Continue reading

Why We Need More Speculators

by Chidem Kurdas

Greek prime minister George Papandreou demands a crackdown on credit default swaps. It’s easy to see why politicians bring up wicked speculators whenever some economic hardship shows up. It’s an old game to put the blame on others to deflect it from yourself.

Middlemen have been successfully pilloried for millennia. Ancient Athenians, faced with rising prices, hauled grain merchants to court some 2400 years ago. Could it be that throughout history speculators have messed up markets, hoarding wheat in ancient Athens and trading dodgy derivatives on post-modern Greek debt?

Indeed, they can become a problem if there are only a few of them. Continue reading

Citi Phibro Selloff Shows Government Sham

by Chidem Kurdas

You’d think that the federal government wants Citigroup to return to financial health—if for no other reason to recoup the $45 billion of taxpayer money spent to shore up the bank in the credit freeze. You’d think the government wants a real effort to boost efficiency and profits. You’d be wrong.

What the Feds chose is a political charade. The pay czar objects to the $100 million compensation due to Citi’s star energy trader. Since the trader is contractually entitled to a share of the profits from Phibro, the phenomenally profitable energy trading subsidiary, there is no legal way not to pay him. So instead Citi is pressured to sell Phibro.

The bank complies. Occidental Petroleum snaps up the business at a bargain basement price. The WSJ quotes Occidental’s president as saying, “If you’ve got to sell, why should I pay a premium? What leverage does the seller have?” The lucky buyer added that Citi would never sell Phibro if it weren’t for pressure by the government.

Citi’s balance sheet is now in worse shape. It lost one of the few businesses that made money last year and had to sell under the worst possible circumstances, created by the government. Instead of slimming down by gradually getting rid of inefficient divisions so as to become a better-run company, the bank was forced to almost give away a valuable asset. And this to make it look like the government combated excessive pay. Continue reading

Commodity Politics

Chidem Kurdas

President Obama’s choice to head the Commodity Futures Trading Commission, Gary Gensler, reassured members of Congress that he is committed to fighting speculation.  Thus continues the political game that started in early 2008 when oil prices climbed to $148 a barrel. Pundits and politicians blamed financial speculators.

The price of oil collapsed in the second half of 2008 as soon as it became clear that the demand was shrinking and would continue to do so because of the global economic slump. Here’s a surprise: the price of oil is determined by supply and demand. The economic downturn had a dramatic impact not only on current worldwide demand but expectations as to future demand.

You’d think that as the facts sank in, charges that speculators drove up prices would end. But these days vowing to fight evil speculators makes good show and Mr. Gensler had to demonstrate that he’s with the agenda handed to him by Mr. Obama, which is “regulating some of the unsound practices and excessive leverage that helped cause this crisis.”

The word speculator might conjure up the image of shady figures operating on the edge of the law. Nothing could be further from reality. The so-called commodity speculators are mainly institutions such as public and private pension funds and university endowments. Continue reading