Category Archives: leverage

Q&A With The Global Journal: Oil Trading And The Casino Syndrome

Happy National Pancake/Leap Year/Week before Super Tuesday Day, all. It has been a turbulent past few months and not just in the oil market. I will get into why very shortly but, for now, let’s just say that after a long and dark winter, I am once again available for dancing in the streets. Without any further cryptic remarks, I’d like to share an interview I just did with The Global Journal, based in Geneva, which rang me up to discuss ‘The Asylum’ and what the future holds for the energy market and gas prices during this, our illustrious Election Year.

(Q portions courtesy of Janine Huguenin-Virchaux, the magazine’s books and culture editor.)

Your book mentions that “the market is no longer reflecting supply and demand.” What is the use of a market that does not reflect the true price of oil? Do we need new hijackers?

That’s a great question – do we need new hijackers? If we could get some hijackers that could take back the market so that it does reflect supply and demand more clearly, then I would say yes, we do! However, I would also say that there is a serious debate going on about the extent to which price does reflect supply and demand. I think there is very good reason to believe that the price does not reflect it anymore. There is also a very technical reason for what has been going on that has not really been acknowledged or understood by many people. And that is the relationship between speculation and price discovery. A lot of the information that I get is from people who read the book and then they come to me and bring me stuff that nobody seems to really know about.

A lot of these guys are just regular traders who trade physical oil and feel that supply and demand is not reflected in the price correctly anymore. Whereas their entire lives – some of these men and women have been trading oil for thirty years or more – they feel the price did reflect it. So they believe there’s a huge difference in what they are seeing today in terms of the market fundamentals versus the price. And what they used to do was see price and fundamentals fit together better. They see a lot of distortion happening now. A lot of these people are concerned with that. I want to say, it’s not all about making money for these people: some of them look at this and say “Oh my God, it’s not acting the way it used to anymore and it doesn’t look like it’s headed anywhere good.” And that is aside from the fact that trading has become so ferocious that it is more about preserving a global casino than about supplying oil to people who need it.

That’s the problem. The casino aspect overshadows everything. Most of the people who play this game don’t want oil. They just want to play the game.

What is the alternative? I mean, these are the people who are speculating on the price of oil. Is there anything that can change to make it different? To make it less casino-like?

Yes, I think so. I am considering writing about this much more, the nature of speculation… Continue reading Q&A With The Global Journal: Oil Trading And The Casino Syndrome

The Boy Wonder At The Heart Of A Disaster

Something to inspire your Friday: The story of a 30-year-old from Sunrise, Florida, who’s defying Wall Street — and not getting hit with a nightstick for it.

Who is James Koutoulas and how did this 30-year-old end up leading the charge to recover more than $1 billion for customers from one of Wall Street’s biggest bankruptcies?

By Leah McGrath Goodman, contributor

FORTUNE — James Koutoulas walked into one of the worst bankruptcies in U.S. history with almost zero legal experience.

“When I got up the first day in bankruptcy court and saw the look on the judge’s face, I couldn’t blame him,” he says. “Bankruptcy court is a rich man’s club where everyone is old, so I stood out. Honestly, when I’m shaved, I look like I’m about 12.”

Yet Koutoulas, 30, may be one of the only former customers of MF Global, the now-defunct futures brokerage house, with the gumption to publicly object to the way they are being treated. Since filing for bankruptcy Oct. 31, MF Global’s woes have rapidly piled up – chief among them losing an estimated $1 billion-plus of customer funds. The loss directly crimped the wallets of some of the futures market’s most active participants, from small-time farmers to ranchers to hedge funds.

Koutoulas, chief executive of three-year-old commodities fund Typhon Capital Management, stumbled into the courtroom drama accidentally. His Chicago firm, which conducts the bulk of its business in the futures market, discovered shortly after MF Global’s bankruptcy that $55 million of its $70 million under management had been dragged into the proceedings. This was a surprise, because, by law, customer funds are supposed to be kept completely segregated from a brokerage firm’s own assets. That wasn’t the case with MF Global. For Koutoulas and tens of thousands of other MF customers, it was a rude awakening.

“My goal is real simple: getting everybody’s money back,” he says. Continue reading The Boy Wonder At The Heart Of A Disaster

How To Make Someone Else Swallow Your Losses, The Mastercourse

It’s official: when a Wall Street powerhouse suddenly collapses and (possibly) more than a billion dollars goes missing, it’s no longer just the ordinary taxpayer’s problem. Now, it has moved up the chain. Below, the piece I wrote today for Fortune on what traders do when you misappropriate their money.

While Occupy Wall Street was holding its two-month anniversary rally in Manhattan last week, traders were quietly mounting a rather more sophisticated version of OWS on their own. Call it Occupy Wall Street Bankruptcy Court.

FORTUNE — Big institutional investors are getting a taste of what many frustrated taxpayers experienced during the financial crisis: Being on the hook for losses of a major financial firm against their wishes.

This time, of course, it’s MF Global at the center of the dispute. A once-trusted brokerage with roots dating back to the 1700s, MF Global is now a bankrupt firm suspected of misappropriating customer funds to the tune of at least $600 million.

More than two weeks after MF Global’s Halloween bankruptcy filing, there are more questions than answers and a surfeit of conflicts in an investigation that should be aiming to restore the public’s confidence, but is doing the opposite. On Monday, the bankruptcy trustee for the case announced that there may be much more than $600 million missing from MF Global accounts — perhaps as much as $1.2 billion.

Hundreds of millions of dollars of trading capital and collateral were frozen without notice, dramatically disrupting the derivatives marketplace and ushering in a phalanx of federal prosecutors, regulatory agencies and forensic accountants working around the clock to determine where the missing money is. This, after a lawyer for MF Global assured a New York judge earlier this month “there is no shortfall.”

What’s different about this case?  One hedge fund executive summed it up best: “What is scary about MF Global is that there is no political will in this country to look out for people. Let this be a lesson that, if someone tries to steal from you, there is no one who is going to save you. I mean it is literally the most frightening thing that can happen in finance.”

Led by a sense of outrage — as well as the conviction that if they don’t look out for themselves, no one else will — investors have been pooling information and banding together to defend themselves for weeks. Continue reading How To Make Someone Else Swallow Your Losses, The Mastercourse

Final Words From U.S. Bank Watchdog Sheila Bair

Castle on the Fuschlsee

Not all banks are the same. A handful of banks — such as the one that invited me to speak in Austria this autumn– were not happy to see the multibillion-dollar bailouts, the hue and cry of the public and the resumption of the indefensible bonuses on Wall Street that have, again, given banks a bad name.

I had never been to Salzburg before, so I was heartened to see another American there who had not been either: Sheila Bair, the outgoing head of the Federal Deposit Insurance Corporation, the federal agency that insures bank deposits and unwinds the banks that fail. Bair has been very busy these past few years.

Bair was the only other female speaker in a sea of bank governors, finance ministers and consultants from a wide range of European nations. What united the group, however, was a sense of urgency in examining the origins of the global debt crisis and its possible solutions. A prominent boutique bank in central and eastern Europe, Erste Group, held a series of panel discussions at a private castle in the Alps on Lake Fuschlsee with provocative titles such as “Who needs banks?” (The answer, according to the moderator, was that we would like more “normal banks, banks that take our deposits and don’t try to gamble with them.”)

Ms. Bair offered her own pearls of wisdom in a keynote speech sizing up the banking system and the current state of the world’s financial affairs from the perspective of a Washington insider:

– On the highly popular banking credo of profits will be privatized; losses will be socialized: “There is still an issue with Wall Street’s perception of too big to fail,” Bair says. “The problem is, too big to fail is not over until Wall Street thinks it’s over. I have argued that the ratings agencies should not be rating banks more highly than they deserve, based on the expectation they will be bailed out. It is unfair for the taxpayers to have to put their money at risk again.”

– On bank bonuses: “We have got to do something about these huge bonuses…We are still seeing huge political movements based on the anger generated from this. We do need some tough love to address this.”

– On the fight over the U.S. debt ceiling (our nation, by the way, now owes over $54.5 trillion): “I am not going to defend our politicians…it was appalling, unnecessary and self-imposed,” Bair says, adding: “I am not going to defend it and I feel somewhat helpless about it. It’s a very sad situation.”

– On U.S. politicians primarily being driven by “short-term interests” and “the idea of driving decisions based on keeping your job” (her words): “It’s not like you get into public service for the money, so if you’re not doing the public good, it’s like, why are you doing this?'” Bair, who has worked for George Bush senior and Bob Dole — both military men — offered her suggestion for a better type of leader: those who have gone to war. “If you are willing to go to war for your country, then you’re not just willing to lose your job, you’re willing to sacrifice everything.”

– The prognosis for global growth and stability… Continue reading Final Words From U.S. Bank Watchdog Sheila Bair

The Ascent Of Decline

The decline of ascent.

The shot across the bow in the Great American Decline came at the usual time: just before the weekend after the market closed on a Friday.

This time-honored tradition of announcing horrid things just as one tucks into Friday night was invented by flaks who believed — rightly — that nobody notices anything going on between 4:30 pm on a Friday and 9 a.m. on a Monday.

This hat trick does not always work. When Standard & Poor’s downgraded the U.S. credit rating from ‘AAA,’ the highest rating possible, to ‘AA+’ this past Friday I was traveling through New York and working in offices on Park Avenue. In the streets, it was absolute bedlam.

Later, having dinner on Wall Street with friends it was the same.

This effectively strips the U.S. of its golden credit for the first time in history.

We have lost our standing in the world.

Debt Deal ‘Achieved’…By Leaving Tough Decisions To A Yet-To-Be-Convened Special Committee

Turns out it is not at all hard to find a picture of a sweaty wad of cash on the Internet.

The good news: in a deal yet-to-be-passed by either house, Obama and Boehner’s Raucous Caucus have finally agreed to raise the debt ceiling by $2.4 trillion in two stages, in exchange for an equal amount of spending cuts — with $917 billion of the cuts to span the next 10 years.

How will the rest of the cuts be administered? By special committee. (That’s the bad news.) Why rush these cuts when we were all starting to have so much fun?

Part of keeping the fun going is that Americans will continue to live in the shadow of the sword. Due to a small proviso cleverly tucked into this legislation, if the special committee doesn’t come up with at least $1.2 trillion in additional cuts (the goal here, is actually more like $1.5 trillion in cuts) or Congress doesn’t agree to green-light them, something akin to martial law will kick in.

What will this look like? Think of a nail-bomb set in advance, designed to spray cuts to the military and Medicare if anyone makes one ill-advised move.

Basically, this part of the deal ensures that even you, the taxpayer, will be begging members of Congress to ratify every last spending cut, lest you dial 911 one day and find that nobody answers.

Hey, what’s a bill without a little blackmail?

Still, it is a sad state of affairs that the only way to get things done these days is to hold ourselves at gunpoint.

The bill is expected to be voted on today. Obama, for all his speeches, has been brutally cowed, again. Spending cuts reign supreme, while Bush-era tax cuts remain unchallenged. It is official: our president buckles like a belt.

Americans Quaver As U.S. Prepares To Go Titanic

Lifeboats for senators and bankers only.

Fidelity, which never sends emails, except to market its herd-investing strategies, has suddenly sputtered to life.

This weekend’s missive: “Debt ceiling: what you should know.”

Really. It’s a little late to be sending this now. But what have you got?

It turns out Fidelity is able to direct me to its Web site to get the most clicking, ahem, “best thinking” of its market specialists, who have penned such helpful tidbits as “Inside the U.S. debt drama” and “Fear is not a strategy.”

Fidelity, we know you don’t want us pulling all our money out of our shrinking retirement accounts and stuffing it under our mattresses because that is not good for you. But “Fear is not a strategy”? Come on. That’s pitiful.

We are going down this road no matter what we do now. We’ve heard for a long time something’s gotta’ give. It is just too bad so many people are going to get a lot worse than they deserve.

Just a few letters from the Interblogging universe, written by concerned Americans who now believe their worries will be given more consideration online than by their own congressmen and women… Continue reading Americans Quaver As U.S. Prepares To Go Titanic

The Chickens Must Eventually Roost

Too many Foghorn Leghorns?

The thing about playing chicken is that fatally high stakes are a prerequisite of the game.

And someone — not excluding, say, an entire country — is going lose.

If you believe market pundits like Jim Rogers (an American trader of some fame who chooses to teach his daughter Mandarin and now lives in Singapore) the U.S. has already lost its triple-A credit rating in all but fact.

“Everyone already knows that the U.S. has lost its ‘AAA’ status,” Rogers said (while alternately lambasting the press for taking seriously what he called the ongoing Washington “charade”).

“Anyone who knows what is going on, already knows that the U.S. is now the
biggest debtor nation in the history of the world. It’s only S&P and Moody’s [the ratings agencies] that haven’t figured out what is going on. The investment world knows that the U.S. is not ‘AAA.’”

The truth is, the ratings agencies have figured out the U.S. is not triple-A. But those entrusted with grading the U.S. debt at the ratings agencies have been on the phone frequently with Washington, which means their allegiances are subject to crushing political pressure. Continue reading The Chickens Must Eventually Roost

U.S. Debt Kerfuffle: It’s Not That We Can’t Pay…We Just Don’t Feel Like It

One of their better moments...

Somewhere in the United States, right now, a billionaire is paying his taxes. This makes some people — not naming any names — very unhappy. In our nation, it is imperative that hedge fund managers, for example, pay roughly 15% on earnings via a handy loophole, whereas someone like, say a writer-girl, coughs up over 30%. That strikes some folks as just about right. Call it pursuit of happiness.

Other people’s happiness.

So we have some disagreement there. Elsewhere, others feel that taxing the daylights out of Americans who can’t afford to pay for gas to get to work sounds about right. And that, at one of the worst moments in financial history, forcing Americans to buy health insurance they don’t necessarily want or need so that the healthy insured can subsidize the less-healthy insured is a great idea.

Not saying that insuring everybody as a solid, pie-in-the-sky ideal is not commendable but, Obama, did you ever hear of bad timing? This is why everyone in the opposition thinks you’re batshit-crazy. Why don’t we entertain nirvana after mastering the merely tolerable? Continue reading U.S. Debt Kerfuffle: It’s Not That We Can’t Pay…We Just Don’t Feel Like It

Dear The Fed: You Suck

I was cleansing my inbox today and found this friendly letter to the Fed from 2007 written by our comrades at Long or Short Capital (vaguely connected to our own fake hedge fund, Intergalactic Capital). I was all ready to take a whimsical walk down memory lane, since 2007 was the year before our  financial meltdown. Yet strangely, this missive does not seem dated.

To: The Fed
From:
Long or Short Capital
Re:
You suck

Dear the Fed,

You suck.  You don’t have a backbone and as a result you are slowly and very surely making our country and our currency irrelevant.  Usually the masses rebel and bring down great empires but luckily for us democracy fixed that problem.  Unfortunately, democracy can’t fix how lame and fickle you are and so you will be our ruin.

A few things to tell you:

1) Inflation isn’t 2% like your pathetic CPI ex-Food & Energy says it is.

First of all, as far as I can tell food and  energy are the only two items you should NEVER exclude from an inflation index.  Tell your wife and kids they can have everything in the consumer basket except food and energy and you will quickly see that they are actually the two MOST important and indispensable factors in the CPI.

You can find substitutes for, or go without, everything in the basket EXCEPT those two.

Secondly, stop using “Seasonally Adjusted Intervention Analysis” it’s as sketchy as the  Seldom-Accepted-Accounting-Principles (SAAP) we use to cook the books here at LoS.  I mean writing a computer program to automatically remove any items in the basket which deviate meaningfully from the previous year?  Isn’t the point of the data to SHOW the change versus the previous year, not hide it?  Oh, I found the list of items that you’ve adjusted for and it’s embarrassing. Continue reading Dear The Fed: You Suck