Klein & Co. Futures, Inc. has asked the Supreme Court of the United States to reinstate a Federal lawsuit against the New York Board of Trade (Nybot) and its subsidiaries. The lawsuit stemmed from a scandal involving the manipulation of settlement prices on options in the Pacific Stock Exchange Technology Index by Norman Eisler who at the time was chairman of the New York Futures Exchange (Nyfe), a subsidiary of Nybot, which led to huge losses by Klein and forcing it out of business.

The lawsuit charging Nybot with failing in bad faith to enforce rules that protect participants in futures markets from manipulation and fraud was dismissed by a federal court. A similar lawsuit by a group of traders on Nyfe was dismissed and a lawsuit by hedge fund manager Jim Moore was dropped after the Commodity Futures Trading Commission would not divulge information to the court according to Moore.

The CFTC found in a 2004 order that Eisler had manipulated option settlement prices in the index; it found in a 2001 order that the Nyfe and Nybot violated the Commodity Exchange Act by not following its own market oversight rules.

Klein is being supported by the Futures Industry Association (FIA), which has filed an Amicus brief in support of the petitioner. The FIA states in the brief that, “The second circuit clearly erred, and destabilized the Nation’s Futures Industry buy stripping Futures Commission Merchants of their statutory cause of action against registered entities.” (by Daniel P. Collins)

U.S. District Court Judge Gerard E. Lynch of the Southern District of New York recently made a decision on motions to dismiss various charges against several key people at the former Refco.Some of the denied motions were brought by Phillip Bennett and Tone Grant; nothing surprising there. But some names are closer to the futures side of the business: Joe Murphy, former EVP of global marketing, former CFTC general counsel, Dennis Klejna who came on board as Refco general counsel in 1999 and EVP and COO William Sexton. In the decision Judge Lynch denied motions to dismiss several counts against Klejna, Murphy and Sexton. One note the judge made in his lively 87-page opinion was despite the access by the three to specific documents that may have raised red flags to the problems at Refco, they may not have been suspicious enough to investigate: "In this case, there certainly was a monster under the bed; the question was whether anyone had a reason to look there." Yet in the end, the judge still had reason to believe they were involved enough in the Refco day-to-day activities to deny their motions to dismiss certain charges.
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A Senate committee led by Michigan Senator Carl Levin issued a report Monday claiming that excessive speculation by hedge fund Amaranth Advisors caused wild price swings in natural gas markets in 2006 and “socked consumers with higher prices.”

Levin, who is chairman of the Senate Permanent Subcommittee on Investigations, stated in a release, “It’s one thing when speculators gamble with their own money; it’s another when they turn U.S. energy markets into a lottery where everybody is forced to gamble with them.”

The report, which was the result of a nine-month study, notes that the industry regulator, the Commodity Futures Trading Commission (CFTC) was hamstrung in monitoring the activity of Amaranth because once the fund reached speculative trading limits on the regulated New York Mercantile Exchange (Nymex) Natural Gas markets, it moved positions to the Intercontinental Exchange (ICE) Natural Gas swaps markets, where there are no speculative limits.

The report stated, “At times Amaranth controlled 40% of all of the outstanding contracts on NYMEX for natural gas in the winter season (October 2006 through March 2007), including as much as 75% of the outstanding contracts to deliver natural gas in November 2006.” It went on to say that when Nymex eventually told Amaranth to reduce its positions, they simply transferred those open positions to ICE, maintaining the same exposure.

Despite the claims in the report, Amaranth trader Shane Lee testified in hearings before the committee that market moves were not the result of Amaranth activity and that Amaranth reacted to the markets, not the other way around. Recent studies by both Nymex and the CFTC have dismissed claims that fund activity was driving energy markets but they where mainly focusing on the fund benchmarked to long-only commodity indexes.

The report recommends eliminating the so called “Enron Loophole,” which exempts certain electronic energy exchanges from regulatory oversight. It also recommends increasing the CFTC budget to allow greater oversight and paying for that with a user fee imposed on commodity markets.

Efforts to increase the CFTC’s oversight of OTC energy markets have been pushed by California Senator Diane Feinstein for several years but have consistently been defeated.

One of the things I liked about working on the trading floor was no matter how bad of a day you were having, when the bell rang the day was over and after checking fills you could go home. Electronic trading and for-profit exchanges have changed all that, even the exchanges’ communications staff are working overtime.

An example of this is the two press releases we received over the weekend with varying interpretations of a Friday decision by the Delaware Chancery Court.

Both the Chicago Board Options Exchange and CME Group claimed victory in the battle over Chicago Board of Trade exercise right privileges (ERPs) after the court made its ruling. The court ruled in favor of CBOE, rejecting a motion by two CBOT members asking for a temporary restraining order to prevent CBOE from enforcing rules restricting leasing privileges of CBOT members. The court also granted a CBOE request to suspend proceedings until the Securities and Exchange Commission (SEC) takes action on the CBOE rule changes that claim the CME/CBOT merger extinguishes the CBOT member ERPs.

While apparent victories for CBOE, the court also offered an opinion on its authority to rule on the CBOT complaint regarding the exercise right. The opinion states, “Despite the CBOE’s urgings to the contrary, the Court retains jurisdiction to determine whether the Defendants’ actions have the operative effect of divesting the Plaintiff-class of a vested economic and property interest.”

So there will be no restraining order and the Delaware Court will wait on an SEC decision before taking up the case. As far as the spin coming from each exchange, we won’t attempt to offer a legal opinion. The market however appears to be siding with the CBOE interpretation as a CBOE seat traded today for a record $2.7 million.

Sentinel Management Group, a cash management firm, has halted redemptions of its funds, which according to sources are pooled and may be more affected if a large client takes out funds. The company sent a letter to investors explaining the problems.Download file
One source believes one of the problems with Sentinel's portfolio is that is is pooled, and if one large client pulls out, or if some paper defaults, it would affect the entire portfolio. Further, in looking at its Prime porfolio as of July 30, 2007, the average weighted maturity is 396 months, or 33 years, which is a far less liquid market. Download file. The group also has a 125 portfolio.Download file

The CME Group also made a statement that Sentinel had $1.5 billion under management, of which none was held by the CME. Sentinel is not a clearing member of CME Group or any other exchange. In its release it noted that "Sentinel provides investment advisory and investment services toinstitutional and corporate clients, including a limited number of CME
clearing member firms. Total investments under management by Sentinel are
approximately $1.5 billion. None of these funds are on deposit with CME
Clearing to support performance bond or collateral requirements. Sentinel
is registered with the Securities and Exchange Commission (SEC) pursuant to
the Investment Advisors Act of 1940, and is also registered with the CFTC
and the National Futures Association (NFA) as a non-clearing futures
commission merchant (FCM)." And that all clearing members had met their clearing obligations."

Every other year or so a U.S. president presents a budget to Congress with a user fee on futures to fund the Commodity Futures Trading Commission (CFTC). Such fees are invariably pulled out before the budget becomes law after sufficient pressure from the futures industry is placed in high places.

This year may be different. The Senate Permanent Subcommittee on Investigations (PSI) in its report, “Excessive Speculation in the Natural Gas Market” released in June recommended such a fee in order to bolster the CFTC’s ability to monitor markets.

In addition the White House Office of Management and Budget issued a statement supporting the measure. “The House should also approve the proposed transaction fee on futures and options contracts.” The statement cited the PSI report and added, “[the] CFTC is the only Federal financial regulator that does not derive its funding from the specialized entities it regulates … it is appropriate for those participants to contribute toward their cost.”

Perhaps President Bush heard about CME Group Executive Chairman Terry Duffy’s endorsement of Sen. Hillary Clinton (D, N.Y.) for president.

House minority leader John Boehner (R, Ohio), who in the past confidently stated such fees would be dead on arrival at industry gatherings and who is a close friend of Duffy, would not provide such a guarantee when asked about the fee in March.

In July, Gregory Mocek, director of the division of enforcement at the Commodity Futures Trading Commission (CFTC), sent a letter to the Washington Post in regard to a piece it ran that he said contained several inaccuracies regarding the case filed by the CFTC against Amaranth Advisors LLC.

Mocek said in the letter that the CFTC began investigating Amaranth in June 2006, which was, “well before its collapse and before congressional inquiries. To characterize a 14-month investigation of Amaranth as a response to political pressure demonstrates a lack of appreciation of how enforcement cases are brought at agencies such as the CFTC,” adding, “Rest assured, when we find evidence of manipulation or artificial prices, we investigate and bring appropriate action, as demonstrated by our ongoing investigations of more than 100 individuals and companies for possible manipulation in the energy markets. Enforcement, together with our comprehensive futures market surveillance program, has proved to be an effective form of deterrence, signaling to market participants that illegal conduct will be uncovered and prosecuted.”

The Securities and Exchange Commission (SEC) filed a lawsuit against Sentinel Management Group in U.S. District Court of Northern District of Illinois on Aug. 20, stating that the firm, which claimed to have $1.2 billion in assets under management, "defrauded its clients by improperly commingling, misappropriating and leveraging their securities without their knowledge in violation of the Investment Advisers Act of 1940." Download file

The lawsuit alleges that Sentinel transferred at least $460 million in securities from client investment accounts to the firm's proprietary house account, and used those securities as collateral to get a $321 million line of credit from a bank. Although the bank was not mentioned, the Bank of New York was where Sentinel kept its segregated accounts. Although not named in the suit, Sentinel Chairman Philip M. Bloom and President Eric A. Bloom, the father-son team that ran the firm,have some explaining to do. Both have long ties in the industry and their firm's actions, at least alleged by the SEC lawsuit, appear now to have less to do with bad trading and more to do with possible fraud. More to come.

The Securities and Exchange Commission continued its volley on Sentinel Management Group, as the firm awaits a bankruptcy trustee to be named Aug. 23. In filing a Temporary Restraining order on Sentinel, Lou Gracia, assistant regional director for the SEC notes in his declaration that the SEC went into the Sentinel offices Aug. 15 — a day after Sentinel's halt on redemptions was reported in the press — and met with Sentinel President Eric Bloom, CFO Theresa Arana and the chief compliance office J. Matthew Keel. Although Sentinel told clients that the reason for the the redemption freeze was the market volatility, Gracia notes "This explanation is false and misleading. As described below, the clients' exposure to loss was exacerbated by the undisclosed use of leverage and apparent commingling and misappropriation of clients' securities. At the time the August 13 letter was sent to clients, the securities reported on account statements provided to clients bore no relation to the actual securities held for clients as reflected in their custodial account records."Download file

The mother of all lawsuits was filed against the usual Refco defendants last week by Marc S. Kirschner, trustee of the Refco Litigation Trust. The suit, filed in the Circuit Court of Cook County, Ill., slams the usual suspects: Phillip R. Bennett, Santo C. Maggio , Robert C. Trosten and Tone N. Grant, but then also accuses other firms and individuals of basically aiding and abetting the schemes that led to the Refco bankrupcy.

In the 158-page suit, the trustee alleges that "the defendants include a "who's who" of some of the biggest names in corporate finance, law, and accounting, whose reputations and substantial assistance were required for Bennett, Maggio, Trosten and Grant (the "Refco Insiders") to strip out billions of dollars in Refco assets. Bennett and other Refco Insiders face criminal charges for their misconduct. The trustee brings this action to recover from the Refco Insiders and those who knowingly assisted them in stripping out Refco's assets, causing billions of dollars in damage to the Company and its creditors." See the full lawsuit here.

In an attempt to stem the rising tide of criticism, whether warrented or not, the National Futures Association (NFA) will be sponsoring a membership forum on Oct. 15 from 2 pm - 4 pm at the UBS Conference Center in Chicago. This is an important step for the self regulatory agency that was in the eye of the storm that became the Sentinel Management Group demise. Members have criticized how the Sentinel SRO allowed Citadel Investment Group to buy up the Sentinel portfolio with the best quality paper for a discount, hurting those clients in that portfolio.

It seems that significant changes to the Commodity Futures Trading Commission (CFTC) are just around the corner, if and when reauthorization of the regulatory body comes up for a vote someday.

On Wednesday, the CFTC’s Acting Chairman Walter Lukken testified before the Subcommittee on General Farm Commodities and Risk, (the title of which alone is testimony for the need to change), and proposed that the Commodity Exchange Act be amended such that the CFTC has four new authorities:
1. Require large trader position reporting
2. Require exempt commercial markets (ECM) to adopt position limits or accountability levels.
3. Require ECMs to exercise self-regulatory responsibility over that contract to avoid manipulation; and
4. Provide the ECM and the CFTC with emergency authority over that contract.

In press statements, the Nymex and the Intercontinental Exchange both came out in support of changes to the current regime, and as they are potentially the most affected by the changes, that is all well and good. The question is now and will be, should this apply to all ECMs all the time? Lukken addressed that issue by adding that “price discovery is the key determinant to Commission regulation and oversight.” But is this the targeted approach that the ICE and Nymex intend to support? Maybe, maybe not.

The Commodity Futures Trading Commission ’s (CFTC) new kid on the block, Commissioner Bart Chilton, wants the agency to “get down to brass tacks.” Chilton set some lofty goals (well, lofty for the slow-moving CFTC, anyway) this morning at the Futures Industry Association’s (FIA) annual expo. But other members of the panel want to see a lot less talk and a lot more action from the CFTC.

Commissioner Chilton, who was sworn in last August, took a firm stance on fixing the CFTC’s actions –or rather inactions – of late. “We have the responsibility to look at what we’re not doing right…they’re not huge issues. We just need to get down to brass tacks and finalize these things,” Chilton said.

Lawmakers are still talking about the stall of the U.S. Farm Bill. Today the House Agriculture Committee marked up a bill to reauthorize the Commodity Futures Trading Commission (CFTC). This bill would provide exclusive jurisdiction to the CFTC in regulating energy markets. It remains to be seen how far the bill will go in Congress or in the Senate. Meanwhile, the Farm Bill is still held up, and members of the Ag committee made some noise in their meeting today about getting it passed. Committee Chairman Collin Peterson said the House could get the bill done by the end of January, but said he thinks “there are people in the Senate who do not want a Farm Bill.” Congressman Jerry Moran of Kansas said that “everyday Americans who farm are waiting for answers” about the bill.

This morning, the Securities and Exchange Commission (SEC) ruled in favor of the Chicago Board Options Exchange (CBOE) in their plea to eliminate former Chicago Board of Trade (CBOT) member's CBOE exercise rights. The CBOE/former CBOT members fight will now move on to a Delaware court, where CBOT members have filed suit against the CBOE on the equity issue. At a luncheon for journalists in Chicago yesterday, CBOE Chairman William Brodsky called the SEC ruling the next-to-last stop to the end of the line for the CBOE’s demutualization process. Interestingly, both the CBOE and CME Group said they’re happy about today’s development. Shortly after the SEC ruling, CME Group released a statement saying “We are pleased that the SEC agrees with CME Group that the merits of our claims reside in the Delaware courts. The ruling clearly emphasizes that the state court's decision takes precedent in preserving the exercise and property rights of CBOT members.” In CBOE’s statement on the news, Brodsky said, “CBOE applauds the Commission for addressing the exercise right issues with certainty, clarity, and specificity.” It’s funny that both sides are cheering the ruling and declaring victory.

After the Department of Justice (DoJ) released its comment letter last week on the regulatory structure associated with financial institutions advocating the changing of regulatory policy “so as to foster exchange competition by, inter alia, ending exchange control of clearing,” we decided to ask a few trading experts what, if anything, they would like to see change in the clearing structures at CME Group or any other exchange. Based on its comment letter, the DoJ “doesn’t have a good handle on how the markets work,” says Phil Flynn, VP and senior market analyst at Alaron. The breakup of clearing from the exchanges “would hurt the U.S. markets” and make it easier for foreign competition, Flynn says. “There’s no need to break up the CME Group” from its clearing, Flynn says, adding that he thinks the clearing structure at CME works well in its current state. “They’ve been clearing trades successfully for over 100 years,” and there’s no need to change that, he says. For more on the DoJ's comment letter and reaction from various industry players, see the March issue of Futures magazine.

In a press conference this morning, The Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) signed a memorandum of understanding (MOU) to “formalize and extend cooperation” between the two agencies. SEC Chairman Christopher Cox called the MOU broad in scope. The agreement establishes a permanent regulatory liaison between the two agencies, calls for the two staffs to meet formally every quarter and consult on mergers that will impact the two agencies, sets up a framework for sharing information, and focuses on new derivatives products. In particular, they will consider two new derivative products under the agreement, and are issuing notices requesting public comment on the new products, which are based on the streetTracks Gold Trust Shares. One product is an option that would be traded on options exchanges, and the other is a future that would trade on a single stock futures exchange. The two agencies also will address efficiencies on portfolio margining and how foreign stock indices are treated under their regulatory structures.

Hot on the heels of the rogue trader incident that cost the firm $141 million a couple weeks ago, MF Global shares declined to $6 per share on Monday, March 17 from $17 on Friday, March 14. The loss prompted the company to issue a press release yesterday stating that its counterparty relationships are sound, that it is not experiencing any difficulty with its repo lines and has no exposure to subprime mortgage backed securities. And Joe Lewis, the Bermuda based football team owner who lost a billion dollars in the Bear Sterns debacle, he’s not a client. The CME Group, New York Mercantile Exchange and the Intercontinental Exchange issued releases stating that the company continues to meet its obligations to their clearing houses, and even the Commodity Futures Trading Commission stood up and said the firm continues to meet its regulatory requirements.

Wall Street is buzzing today about the U.S. Department of Treasury's blueprint for reform on the financial regulatory structure. Major players in the futures industry, like the CME Group and the Commodity Futures Trading Commission (CFTC), are weighing in too, more specifically on Treasury's intermediate-term recommendation to merge the Securities and Exchange Commission (SEC) and CFTC. While cheering Treasury's decision to overhaul the financial services regulatory system, both the CME and CFTC's messages were clear: fix what's broken with the SEC (or, rather, harmonize the regulatory approaches of the two agencies) before considering any merger activity. CME said the merger proposal "should be addressed following further harmonization of the separate and very distinct regulatory frameworks applicable to futures and securities markets. We agree with Secretary [Henry] Paulson's conclusion that the SEC and Congress need to act promptly to align more closely the SEC's systems and procedures with the governing philosophy of the CFTC. We understand that this reform of the SEC needs to be completed before the process of considering a merger between the two agencies can begin."

One of former Refco president Tone Grant's defense attorneys noted in court documents transcribing the discussions the day the jury returned a verdict that a phantom mark on the jury verdict form, caused due to printing, was in the guilty box, and was a "bad omen," he said. And though he was right, perhaps a worse omen for his client was that two Refco executives Phil Bennett and Robert Trosten had pled guilty to fraud charges.Download file

Tone Grant, often described as the All-American guy who played football at Yale and served in the Marine Corps., was found guilty on all counts of defrauding investors of $2.4 billion. Download file Another bad omen for Grant, when he is sentenced Aug. 7, 2008, is that in final comments the trial judge thanked the jury as being "a really terrific jury." No doubt, the judge agreed with the verdict.

The sad story of Refco still has more to go as Mayer Brown's Joe Collins is up next for trial.

Reauthorization of the Commodity Futures Trading Commission (CFTC) hit an an unlikely delay yesterday when lawmakers revealed a goof in the Farm Bill which includes a measure to reauthorize the CFTC. The bill passed the House and Senate last week with the two-thirds majority required to override a veto. It was vetoed as expected by President Bush yesterday. House members then voted to override the veto, and the Senate was set to vote on an override as well when it was discovered that a 34-page section of the bill had been omitted from the bill sent to the White House due to a "printing error," the AP reported. According to the AP, because Bush vetoed a different bill from the one Congress passed, the eventual law could be rendered unconstitutional.

Earlier today, the AP reported that because pages were missing from the vetoed Farm Bill sent to President Bush, a re-vote by the House and Senate on the bill, and a re-submission of the bill to the President, would be required. However, now Congress has gone ahead and overriden Bush's veto and passed into law all parts of the bill except the missing pages (which included a section on trade policy). The release by the House Ag Committee said: "Today, the House also took action to correct the clerical error that resulted in the unintentional omission of the trade title from the enrolled farm bill and ensure that the entire farm bill is enacted into law swiftly. Most of the farm bill is now law." The Farm Bill includes the CFTC Reauthorization Act of 2008.

Nothing appears to generate efforts towards transparency and compliance more than the threat of government regulation and on Thursday the Commodity Futures Trading Commission (CFTC) and Intercontinental Exchange (ICE) announced steps to create greater transparency in the reporting of energy trading in general and crude oil in particular.

The CFTC announced “multiple energy market initiatives,” in a release yesterday. That was followed by a release from ICE stating that it had facilitated the development of a cross-border program to provide enhancements to its energy market data reporting in concert with the CFTC and the U.K. Financial Services Authority (FSA) related to its West Texas Intermediate (WTI) crude oil futures contract.

The moves may have been prompted by multiple efforts in Congress to place blame somewhere for rising energy costs. The Oil Trading Transparency Act seeks to apply U.S. reporting requirements to non-U.S. markets and the Consumer-First Energy Act of 2008 calls for higher margins on crude oil futures.

Today the U.S. Senate Committee on Commerce, Science and Transportation became the latest Senate committee to hold a hearing to investigate whether increased speculation in the energy markets is affecting oil prices. Those testifying at the hearing disagreed with the current line of the Commodity Futures Trading Commission (CFTC) that factors relating to supply and demand are driving up the price of oil. Michael Greenburger, former director of the division of trading and markets at the CFTC, said that at least 70 percent of the crude oil market is driven by speculators. Greenburger said international oil contracts such as the Intercontinental Exchange's (ICE) West Texas Intermediate (WTI) contracts traded in London are "robbing us blind." On May 29, the CFTC announced energy market initiatives implementing expanded information-sharing to provide the CFTC with daily large trader positions in the UK WTI crude oil contract and provide crude oil large trader position data for all contract months in the WTI contract and announced the continuing of a CFTC investigation on crude oil. Greenburger noted that on the day of the CFTC announcement, the price of oil went down and the dollar went up.

In response to the tounge lashing the Commodity Futures Trading Commission (CFTC) got from hedgers at its April forum to discuss record volatility in the agricultural markets, the agency released several agricultural market initiatives today that are designed to "improve oversight of the futures markets and bring greater transparency to the types of traders in the marketplace, including large index traders." Among these initiatives are a review of trader reporting and classification and a withdrawal of the proposals to increase spec limits, which were widely criticized by participants at the forum. Perhaps in response to the very loud chorus of disgruntled cotton producers at the forum, the initiatives also include an investigation into the February/March price run-up in cotton. The Intercontinental Exchange, which took a lot of heat at the forum on the cotton situation, released a statement in support of the initiatives. In a conference call, CFTC Acting Chairman Walt Lukken said that the CFTC also is reviewing the process of how commercial and non-commercial traders are classified. The aim of all of these initiatives, he noted, is to "make sure the markets are functioning correctly." Lukken also said that the authorities brought about by the reauthorization of the CFTC last week would be helpful in our "oversight of the exempt commercial energy markets" and "bring greater transparencies to those markets."

It's Tuesday, which means it must be time once again for what has become practically a weekly occurrence: a Senate hearing on speculation in the energy markets. Commodities Futures Trading Commission (CFTC) Acting Chairman Walt Lukken testified before the Senate Committee on Agriculture, Nutrition and Forestry, saying basically that the CFTC needed to further investigate these problems and that the agency required increased funding and staffing to do so. It's a bit of a switch from his previous testimony stating that supply and demand factors were at fault for the increase in commodity prices. Today, the CFTC announced modifications to its Foreign Board of Trade process and amended its “no-action relief letter” under which ICE Futures Europe is permitted direct access to U.S. customers.

Commodity Futures trading Commission (CFTC) Acting Chairman Walt Lukken should be getting better at testifying before Congressional committees but appeared somewhat weary at yet another hearing on Tuesday morning. One Senator questioned how Lukken could respond that he was not sure of the effect of speculation on commodity prices after noting at past hearings that he thought supply and demand were the determining factors. Apparently the questions are wearing on Lukken and to be fair, it is the Senators who seem to have made up their minds regarding the role of speculation on prices. And based on some of their questions, they clearly have not conducted the level of research into the matter as Lukken has. Lukken however, should be happy that a consensus is forming to appropriate more resources to the CFTC. Sen. Dick Durbin (D-IL) has introduced legislation to increase the CFTC budget and reiterated that pledge at today’s hearings.

I guess we should come to expect more heat than light from such hearings but it is disturbing when members of Congress seem to present disingenuous arguments.

When CME Group stock gapped up more than $16 on Tuesday there was little doubt it had to do with the exchange securing approval from the Department of Justice for its proposed purchase of the New York Mercantile Exchange (Nymex). The announcement came out just as the markets closed on Monday.

It was somewhat of a surprise because although the DOJ has caused CME some grief with its comment letter to Treasury regarding clearing structure, few suspected that they would raise an objection to a merger with Nymex. While there may have been an element of buyers remorse with the DOJ regarding its decision to “approve” (DOJ does not actually approve M&As, they either object or leave it alone) the CME/Chicago Board of Trade merger, CME Group’s proposed purchase of Nymex should have raised fewer issues than the CBOT deal that already had been allowed.

It has been almost one year since the subprime problems first surfaced last July as two Bear Stearns hedge funds acknowledged that they had lost virtually all of their funds. It was the beginning of a slow drip of disturbing information regarding the extent financial institutions, primarily investment banks, were affected by subprime holdings.

While it was the collapse of a couple of hedge funds that introduced us to the problem, it was the investment banks that had the greatest exposure. So much so that the Federal Reserve had to open its lending window to these institutions for the first time in 80 some odd years and arrange the bailout of Bear Stearns. And while hedge funds continue to be watched with suspicion, it is the banks who have had to book billions of dollars of losses due to this exposure.

After weeks of tough sounding rhetoric directed at speculators and the regulatory agency allowing them to speculate, Congress took bold action, kind of.

Thursday the House of Representatives passed the Energy Markets Emergency Act. The bill requires the Commodity Futures Trading Commission (CFTC) “to utilize all its authority, including emergency powers, to take steps to curb excessive speculation in the energy futures markets." It passed overwhelmingly by a vote of 402-19.
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The bill falls far short of some of the draconian measures being recommended in recent hearings such as manipulating futures’ margins to direct market activity and restricting pension money from investing in commodity index funds. Basically it directs the CFTC to do its job and authorizes it to use the authority inherent to it—including emergency powers—to do it.

The day after hedge-fund fraudster Sam Israel III gave himself up to authorities, another one of the dubious dodgers of corporate America was sentenced for his fraudulent dastardly doings. Phillip Bennett, former CEO of Refco, was sentenced to 16 years in prison on July 3. He had pled guilty in February to 20 counts of fraud, conspiracy, money laundering and lying to auditors.

That's it. For bringing down a financial institution, he only got 16 years. Money lost due to his scheme: $2.4 billion.

Let's compare that to some other white color criminal sentencing:

Although Refco officer Tone Grant also was found guilty, he's not being sentenced until early August and further, he didn't plead out his case. He could face 85 years. Money lost due to his (et al) scheme: $2.4 billion

Recently on the lam hedge fund fraudster Sam Israel III will spend 20 years in jail, with another 10 possibly tacked on for his little fugitive drama. Money investors were out due to his scheme: $400 million.

There has always been something controversial about the Federal Reserve System and it has been a target for conspiracy theorists thanks to its complex structure and mix of private and public underpinnings. For an institution that is not technically part of government it wields a huge amount of power over our economy and has the authority to picks winners and losers as demonstrated by its recent intervention in the blow-up of investment bank Bear Stearns.

Tuesday Fed Chairman Ben Bernanke politely asked for additional powers. He noted in a speech to the Federal Deposit Insurance Corporation that, “Another possible step to reduce the incidence and severity of financial crises, recently proposed in the Treasury blueprint for regulatory reform, would be to task the Federal Reserve with promoting the overall stability of financial markets.”

On Tuesday, Sen. Harry Reid (D-Nevada) introduced yet another bill on designed to "curb excessive oil speculation." This one, however, left out previous bills' calls to impose higher margins on oil traders, such as the one introduced by Sen. Byron Dorgan (D-ND) on June 24 which would require the Commodity Futures Trading Commission (CFTC) to increase margin requirements to 25% for trades classified as non-legitimate hedge trades. Reid's bill calls for "eliminat[ing] excessive speculation by changing the definition of 'legitimate hedge trading' to include only those producers and purchasers of actual physical energy commodities, and places limits on trading by those who are not trading actual physical petroleum products." The