Wall Street Déjà vu Again

[Policing Wall Street]

Déjà vu all over again.

That’s what Yogi Berra, the greatest living Yankee, would say.  Yesterday’s front page of The Wall Street Journal shouted: “Oil Speculators Under Fire.” 

It appears that several Senators, and apologies to Bernie Sanders, are attempting to grab headlines by blaming oil speculators for the rise in the price of oil, even while consumption is declining. 

These genius senators, who blame speculators, do not want the commodity futures to be regulated by the Securities and Exchange Commission (SEC). Why is this, the reader might inquire?  Because futures in a commodity such as oil and even stock index futures are regulated by the Commodities Futures Trading Commission, which has fewer teeth than a newborn baby. 

These senators do not want the futures exchanges to be regulated by the SEC, which has more stringent laws.  (Yes, I know that this is hard to believe after the Bernie Madoff fiasco.)

Of course several years ago, before the latest market crash, members of the Senate, most notably Christopher Dodd and Chuck Schumer, were praising the same financial ingenuity, which arose from speculators rigging the market. Of course the biggest contributors to their re-election campaigns were these same genius financial contributors.

But let us return to a simpler era; when I was a market maker on the American Stock Exchange and gold was traded on the Comex, a commodities exchange. At this time in the early 1980s there were position limits—that is limits on the number of futures and options that could be held by a trading firm.  But these limits were easily circumvented.

And I will describe several methods.

One trader was a huge player. He cleared through Spear Leeds and Kellogg. When he reached the position limits, which is the number of contracts that he could hold, he merely opened up another account at another clearing firm, in this instance Bear Stearns.  

Now everyone knew of this subterfuge. Spear Leeds and Kellogg. Bear Stearns. And even the Comex, which was supposed to regulate their own rules for position limits. 

Now you might inquire:  How would Bear Stearns (BS), Spear Leeds and Kellogg (SLK), and the Comex know?

Everyone knew that the trader cleared all his trades through SLK because it had helped him out when he was beginning to trade.  SLK knew that he had an account at BS because SLK transferred money from an account at SLK to an account at BS.

The margin department of Bear Stearns knew because they delivered his Comex (gold) trading sheets to him when he was wearing his Comex badge, which denoted SLK as his clearing firm.  And the managing director of clearing at Bear Stearns knew because he would occasionally deliver the trading sheets personally- especially when there was a margin call.

The Comex knew because this trader told me that they knew but did not care so long as he traded heavy volume so that the gold options would show up as a heavily traded product.

But how else might the Comex have known?  Well when one huge trading firm went out of business on the Comex, the name of the partner in the other firms which had traded with the bankrupt firm was required to sign papers concerning the bankruptcy.  This individual signed for the two allegedly separate companies.

And then these documents were forwarded to the CFTC- so the CFTC knew. 

The above situation was explained to me by another Amex member who was also a Comex member.  This member balked at the refinancing agreement and provided confirmation of the above machinations to me.

The same trader, who had two trading firms so that he could circumvent trading limits, decided to avoid paying taxes on his profits. So, he set up a trading account at a private Swiss Bank (a relative owned the private Swiss Bank).  He would then enter into trades with himself via his domestic (American) trading firm and via his foreign (Swiss Bank) trading firm.

The winning trades would go into his Swiss firm. His losing trades would go into his American firm. And he would avoid paying taxes on his profits. A trading situation similar to Marc Rich.

Who knew of this, you might inquire. Well SLK knew of this because his Swiss account cleared through SLK and money was wired between his accounts.

So, whenever you hear one of your Senators pontificating about speculation, he is usually seeking an increase in campaign contributions from financial firms.

And it is déjà vu all over again.