Regular readers will remember my question in this post (Jul. 5):
Magical Markets, Enron and GE and a New Word
"Speaking of Enron, does anyone know if Congress has repealed the Enron exemption in the Commodity Futures Modernization Act of 2000, first enacted by Wendy Gramm (Republican) as a CFTC rule in 1993 and signed into law by Bill Clinton (Democrat) during his last month in office?
I bet General Electric knows."
The answer is NO, not repealed yet!
And yes! I'm sure G.E. knows, they seem to be using a copy of Enron's playbook; remember this headline from three weeks ago?:
NEW YORK (MarketWatch) -- General Electric's Energy Financial Services unit said Tuesday it would pay $603 million to buy interests in Regency Energy Partners...
I'll get back to this someday, right now:
A good primer on trading and natural gas
From the U.S. Senate Permanent Subcommittee on Investigations (JUNE 25 & JULY 9, 2007 HEARINGS) page 8 :
B. RECOMMENDATIONS
(1) Congress should eliminate the “Enron Loophole” that exempts electronic energy exchanges from regulatory oversight. Experience since passage of the Commodity Futures Modernization Act of 2000, demonstrates there is no sound rationale for exempting electronic energy exchanges from regulatory oversight.
From the report (page 4):
Natural gas traders are well aware of the consequences of this limitation. For example, when Amaranth’s lead energy trader predicted in an email that “boy I bet you see some CFTC inquiries” into a price spike that affected the final price of the September 2006 futures contract, another trader reminded him that most of the trades had taken place on ICE using swaps. The trader wrote: “Until they monitor swaps no big deal.”
Backround (page 1)
Shortly after the Subcommittee issued the [oil] report in 2006, the natural gas market entered a period of extreme price volatility punctuated by the collapse in September 2006 of Amaranth Advisors LLC (“Amaranth”), one of the largest hedge funds in the natural gas market.
From the last week in August until the middle of September 2006, Amaranth’s natural gas positions lost over $2 billion in value, precipitating the liquidation of the entire portfolio of the $8 billion fund.
(Page 2)
The trading records examined by the Subcommittee disclosed that from early 2006 until its September collapse, Amaranth dominated trading in the U.S. natural gas financial markets. Amaranth bought and sold thousands of natural gas contracts on a daily basis, and tens of thousands of contracts on certain days. It accumulated tens of thousands of natural gas holdings, or “positions,” on both NYMEX and ICE.
The CFTC defines a “large trader” for reporting purposes in the natural gas market as a trader who holds at least 200 contracts; NYMEX examines a trader’s position if it exceeds 12,000 natural gas contracts in any one month.
Amaranth held as many as 100,000 natural gas contracts in a single month, representing 1 trillion cubic feet of natural gas, or 5% of the natural gas used in the entire United States in a year. 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.
The Subcommittee's report is a 135 page PDF, well worth dipping into.
HT: Risk
I'll get to G.E. one of these days . If you can't wait, research the Lay, Browne, Clinton, Gore oval office meeting.
Or Zond.
Make money, have fun, do good.
